​GST: Council finalizes tax rates; Paves the way for July rollout
The Goods and Services Tax (GST) Council, in its crucial two-day meeting, has finalized the most-awaited tax rates for most goods and services. We believe that the government has struck a fine balance to ensure that the GST rates are non-inflationary. While there has been some divergence from rate expectations for some sectors, we do not see any rationale for near-term buoyancy in the markets as the rates are not disruptive and have been largely kept around the existing structure. We believe that the key monitorable from the market perspective will be GST implementation in the near term and gradual lowering of overall tax rates in the medium term. Also, in our view, GST will be a key catalyst for formalization of the economy over the longer term, triggering supply chain efficiency and boosting government revenues.
FMCG – a key beneficiary
We believe that the FMCG sector stands to benefit from the reduction in tax rates for soaps, toothpastes and adhesives to 18% from 22-26% currently. Similarly, indirect tax levy on lubricants has been lowered to 18% from 27-28%. We believe that companies might either pass on the benefit of lower duties to consumers to spur demand or retain it to derive margin benefits. Indirect tax levies have been broadly maintained for cigarettes, which, in our view, could auger well for the sector. Key beneficiaries: PIDI, ITC, CLGT, CSTRL.
Marginally higher rates for automobiles, cement
For automobiles, the GST rate is fixed at 28% plus cess (1% for small petrol cars, 3% for small diesel cars and 15% for others). This will lead to an increase in on-road prices of small diesel cars and mid-sized cars by ~1.6% and ~2.1%, respectively. On-road prices for large SUVs, however, will decline by ~3%. MSIL derives ~15% and ~8.5% of its volumes from small diesel cars and mid-sized cars, respectively, which may be impacted due to the change in tax rates.
GST rate for cement has been increased to 28% from ~22-24% currently. We believe that the increase in tax rates is likely to be passed on to consumers and may not materially impact overall demand.
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