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Economy

Joy for manufacturers, retailers as India moves closer to unified tax

A Mumbai showroom of Tata Motors, one of the many Indian companies expected to benefit from a unified tax. (Photo by Kuni Takahashi)

MUMBAI/NEW DELHI -- Hopes that the much-awaited goods and services tax may finally see the light of the day has improved the long-term outlook for Indian manufacturing companies, especially those in the automotive and consumer goods sectors.

A day after the constitutional amendment bill on GST was passed in the upper house of parliament, the shares of four auto companies were top gainers for the day. The Bombay Stock Exchange's benchmark Sensex ended higher by just 0.06% at 27,714.37 on Thursday, as market participants said the GST passage had already been factored in.

The bill meant that India could now implement a unified sales tax in April 2017 that would replace the array of confusing levies currently imposed by local and state governments. For many companies, this means a streamlining of costs.

"In the last one month, stocks have gone up nearly 10-15%, so today's movement was a profit-booking reaction," said Sandeep Gupta, head of equity advisory at Motilal Oswal Securities. "It will remain so in the short term. The tax reform will take at least two years to show in the books of companies."

Tata Motors closed 4.41% higher at 500.30 rupees, helped by upbeat sales reported by Jaguar Land Rover cars in the U.S. in July. India's largest bike maker Hero MotoCorp came in second among stocks in the sector with a gain of 1.79% at 3,295 rupees, followed by Bajaj Auto and Maruti Suzuki India which posted gains of 0.91% and 0.48%, respectively.

In the consumer goods space, just Hindustan Unilever made it to the top 15 gainers' list, while others such as Asian Paints, ITC and Dabur India succumbed to heavy profit-taking.

According to Emkay Global Financial Services, for two-wheeler and small carmakers such as Hero MotoCorp, Ashok Leyland, and Maruti Suzuki, a standard sales tax of 18% would enable them to reduce their prices by 9%. The average total tax rate that they pay now is around 27%, inclusive of excise, value-added and central sales tax.

Large automakers such as Mahindra and Mahindra would be able to cut utility vehicle prices by around 5% and sport utility vehicle prices by around 27%, Emkay Global said in a note. "Large carmakers would again benefit largely from savings on logistics and warehousing related costs and a simplified tax maintenance structure."

The implementation of the GST also bodes well for the consumer goods sector as the effective tax rate will be reduced by 2 to 5 percentage points. Hindustan Unilever, Emami and Godrej Industries are seen to benefit, said Raghu Kumar of local brokerage house RKSV.

The other sectors set to gain are consumer durables, cement, logistics and media. With a unified and low tax regime, the new law could also cut tax evasion, and make it easier for authorities to track and reduce black money.

Foreigners gain too

Swedish furniture company IKEA, which is setting up its retail stores in India, and fashion brands such as Gap and H&M are also expected to gain from the GST, which will reduce prices for consumers.

The passage of the bill "is a positive step," said IKEA India's spokesperson Nivedeeta Moirangthem. However, she added that the actual impact on the company would be known only when the GST is implemented.      

The government said the GST will improve the ease of doing business in India, helping foreign companies to expand and set up their operations.

Prime Minister Narendra Modi has pushed hard for the GST reform, the biggest in decades for the country. On Twitter, he said this reform would help the "Make in India" initiative aimed at turning the country into a manufacturing hub, boost exports and thus increase employment while providing enhanced revenues. 

According to the Confederation of Indian Industry, the GST implementation from April 2017 would reduce transaction costs and boost GDP by 1.5 to 2 percentage points.

HSBC Global Research said the short-term impact on consumption and growth could be disruptive and inflation could rise temporarily. If implemented properly, the GST could add 80 basis points to economic growth a few years down the line.

GST is expected to be "unambiguously positive for investment (by lowering the cost of capital goods), tax revenues (by raising tax buoyancy and widening the tax net), foreign inflows (by improving sentiment and the business environment) and jobs (across manufacturing and services), while bringing down inflation as well," it said.

Logistics and e-commerce

According to some estimates, the cost for logistics and supply chain inventory will be curtailed by 30-40%.

K Ravichandran, senior vice president and co-head of corporate sector ratings at local credit agency ICRA, said the implementation of GST would be positive for some of the port logistics players such as CONCOR, Gateway Distriparks and Allcargo Logistics. The GST, he said, would lead to a realignment of warehousing and supply chain requirements of companies.

The GST will also have wide-ranging implications in the Indian e-commerce industry where major players are Amazon, Flipkart and Snapdeal.

"With an increased compliance both for the marketplace and sellers because of tax collected at source and the complexity on account of place of supply rules as against a free flow of goods across states; it is going to be a mixed bag for the industry," said Bipin Sapra, tax partner at EY India.

Kunal Bahl, Snapdeal chief executive, said digital commerce had removed geographical barriers, and now GST would remove tax barriers. "'One India' means faster growth," he tweeted.

"However, tax collection at source by online marketplaces will be a huge working capital burden" for small sellers, he added.

Whether the government can roll out the GST in April 2017 remains to be seen, as there are several steps it has to clear.

The tweaks in the latest bill need approval by the lower house, which the government is hoping would happen "very soon" given its majority there. Then the bill needs to be ratified by 15 of the 29 state assemblies, which optimistically could take a month.

Another step, which could be potentially controversial, is for a GST Council -- comprising finance ministers of central and state governments -- to agree on a GST rate.  

The government said it wanted an optimal GST rate which would take into account the interests of both consumers and states. The opposition Indian National Congress is demanding that the standard rate be constitutionally capped at 18%.

Then, the GST model law would have to be finalized, and subsequently the parliament and state assemblies would have to pass the GST bills. In addition, a robust information technology backbone must be in place for the GST rollout.

"Contrary to popular belief, the passage of the GST constitutional amendment marks only the beginning of a fairly tedious procedure that should ultimately result in the implementation of a unified GST" in India at best by the second half of the financial year beginning April 2017,  said Ritika Mankar Mukherjee, senior economist at Ambit Capital.

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