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GST Rates On Goods: What Gets Cheaper, What Will Cost More

Industry and tax experts’ take on GST rates.



Customers browse soft drinks at a Big Bazaar hypermarket, operated by Future Retail Ltd., in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Customers browse soft drinks at a Big Bazaar hypermarket, operated by Future Retail Ltd., in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Tax rates finalised by the Goods and Services Tax (GST) Council will make daily use products cheaper and may have a marginal impact on capital goods, industry and tax experts told BloombergQuint.

The council, on the opening day of its two-day meeting in Srinagar, finalised rates for at least 1,150 of the total 1,211 items. The rates for services and the remaining items will be finalised on Friday, Finance Minister Arun Jaitley said.

Also Read: GST Council Finalises Rates For Most Items

The rates will pave the way for the rollout of the new indirect tax regime that the government wants to implement from July. Here’s how the sectors for which rates were announced will be impacted...

Consumer Goods

Fast-moving consumer goods including hair oil, toothpaste and soaps will be taxed at 18 percent under GST. That’s lower than the broadly 26 percent tax incidence on these products now.

It doesn’t come as a surprise, Sunil Duggal, chief executive officer at FMCG major Dabur India Ltd., told BloombergQuint.

It is welcome because it reduces the tax incidence from the current level of around 23 percent to 18 percent now.
Sunil Duggal, CEO, Dabur India

Hair oils account for around 20 percent of Dabur’s domestic sales, he added.

Duggal’s optimism was shared by Vivek Karve, chief financial officer of Marico Ltd., who said that the anti-inflationary stance for deciding rates bodes well for consumer sentiment.

If no additional burden of taxes comes on the consumer and if macro economic conditions work, we definitely see good demand from consumers.
Vivek Karve, CFO, Marico Ltd.

This puts consumers in a convenient spot as it will make daily use items cheaper, explained SK Tijarwala, a spokesperson for Patanjali Ayurved Ltd. “It will also be good for manufacturers as raw materials will become cheaper,” he added.

Ajay Thakur of Anand Rathi Securities expects a small improvement in operating margins for companies catering to these segments. He also added that most of it will be passed on to consumers.

The intention is to keep consumer goods inflation under check, said Mayank Shah, category head of biscuits at Parle, adding that the industry will be awaiting further details that come out tomorrow (Friday).

Hindustan Unilever Ltd. (HUL) said the rates were broadly in line with expectations, “barring in laundry detergents and household care products where the rate is at 28 percent which is in contrast to other daily necessity products such as soaps and toothpaste which are at lower slab”. In emailed statement, the company said it will pass on the net benefit from new tax rates.

Commodities

The GST Council agreed on keeping commodities such as sugar, coffee, edible oil and coal in the 5 percent tax bracket.

For sugar, the tax incidence is largely similar to what it was earlier, which is a positive according to Narendra Murkumbi, vice-chairman and managing director of Shree Renuka Sugars.

It is a good move as sugar is an essential commodity. The current level of taxation is almost the same. We were hoping for this and we are very glad it has been done.
Narendra Murkumbi, Managing Director, Shree Renuka Sugars

Coal was earlier taxed in a range of 8 to 11 percent. This has been cut down to 5 percent. This is a positive for the power sector, which already is outside the purview of GST, said Seshagiri Rao, joint managing director of India’s top steelmaker JSW Steel Ltd.

Lower the GST, the better it is for consumers as power tariffs would be reduced.
Seshagiri Rao, Joint Managing Director and Group CFO, JSW Steel

However, Rao said that this won’t be beneficial for manufacturing companies as a “set-off” is possible.

The 5 percent rate on coal is more favourable for utilities and coal-consuming companies, said Tarang Bhanushali of IIFL Private Wealth.

This may not have any impact on Coal India, but utilities like Tata Power and NTPC stand to gain from this. Aluminium producers like Hindalco Industries and Vedanta too, since power is a major cost for these companies.
Tarang Bhanushali, Assistant VP, IIFL Private Wealth

This will help the power industry to fulfill the government’s power-for-all dream at a very competitive cost, said Rajesh Bhatia, chief executive officer of Jindal Steel and Power Ltd. However, he said the cess on coal should have been reduced.

I think they should have done something about the cess too, because the cess is too high at Rs 400 (per tonne).
Rajesh Bhatia, Group CFO and CEO, Jindal Steel and Power Ltd.

Cement will be taxed at 28 percent under GST compared to an earlier rate of 30 percent. Sweets fall in the 5 percent bracket, up from around 1-2 percent earlier. Milk has been exempted from taxation along with cereals. However, there is not clarity yet on tax rates for branded and packed cereals.

Consumer Durables

Goods such as air conditioners and fans will come under the 28 percent bracket, against industry expectations of 18 percent. The segment currently pays 24 percent taxes, according to a report by Motilal Oswal.

Companies such as Havells India Ltd. and Voltas Ltd. will have to initiate price hikes of 2-3 percent in its air conditioner portfolio, the report said. CG Consumers, a manufacturer of fans, will also have to increase prices by 3 percent to 4 percent to maintain its margins.

GST rates for switches and bulbs are the same as the current incidence of tax, the report said.

Capital Goods

All capital goods and industrial intermediates fall in the 18 percent tax bracket. The rate is broadly neutral to positive for the sector, according to Renu Baid of IIFL Institutional Equities.

While most companies would anyway pass on the duties to consumers, engineering and construction companies where the service tax incidence was higher may tend to gain. Companies which also compete domestically for standard products may stand to gain from this.  
Renu Baid, Vice President - Research, IIFL Institutional Equities. 

The rate doesn’t bode well for a company like Thermax Ltd. which pays an inter-state tax of 14.5 percent, and that could become a burden for either the company or the consumers, Managing Director MS Unnikrishnan told BloombergQuint.

Manufacturers selling in the same state stand to gain, he said.

For the companies which manufacture and sell in the same state, the rates stands substantially reduced from 24-25 percent. However, very few companies belong to this category.
MS Unnikrishnan, MD, Thermax Ltd.

IIFL’s Bhanushali said, “Overall, this would not have much impact on the sector. Since, most of this would be passed on to the consumer.”