GST will impact sectors
- · There are expectations that the tax reform will boost the Indian economy and huge shift will be seen from unorganised to organised sector. However, some near term hiccups can be seen for the next one or two quarters. According to market experts, job creation will remain a concern as the unorganised sector shifts towards the organised sector. In the coming slides, ET Markets.com looks at the various sectors and likely impact of GST on them.
- · Fast moving consumer goods sector will benefit from the GST due to the present of big unorganised market. GST rate for products like hair oil, soaps and toothpaste has been lowered by 500-600 bps from the previous rates. Companies such as Colgate-Palmolive, HUL, Britannia, Heritage Foods etc will benefit from the move. Pharma and healthcare
- · Pharmaceutical products will see 12 per cent GST as against earlier rate of 10 percent. Angel Broking believes companies will be able to pass on this full impact to the patients. The healthcare sector will remain exempt from the GST however the inputs by the healthcare sector will be taxed at 18 per cent leading to rise in the operating costs. Companies like Dr Lal Path labs will benefit.
- · Consumer durables White good players were previously taxed at 27 per cent (including 13.5 per cent VAT) against 28 per cent under the new GST regime. There are expectations that with GST coming in picture, there will be some increase in the prices of most consumer durable items. However, market analysts do not see any significant impact on the margins of the consumer durable companies post GST implementation. One should keep an eye on companies like Crompton Greaves, Symphony, Whirlpool, Havells and Voltas.
- · Airlines Travelling in business class will become expensive as after the rollout of GST, tax rate will increase from 9 per cent to 12 per cent. However, GST on economy class is set at 5 per cent, lower than the previous 6 per cent. Aviation Turbine Fuel has kept outside the GST and the indirect tax structure will continue. As a result, aviation companies will now face two set of taxes, i. e. GST and indirect tax. Tax input credit under the GST is only available on input services for economy class travel. Lower tax rate on economy travel is positive for companies like InterGlobe Aviation, Jet Airways and SpiceJet.
- · Brokers and equity investments With the service tax being subsumed into your overall GST, the rate of GST on financial services stands modified from 15 per cent to 18 per cent. Angel Broking in a blog explains that on a 1 per cent round brokerage, your overall cost due to the subsuming of service tax into GST will be about 0.03 per cent or 3 basis points. From a long-term investor’s perspective, this may not be too significant since the overall shift is just about 3 basis points. However, for short term traders, this 3 basis points additional cost will change the economics of churning their funds in the equity markets. Whether that actually impacts the eventual volumes and liquidity in the markets remains to be seen. One thing investors and traders need to watch out for in the equity market is whether this higher cost results increases the basis risk or not. Shares of companies like Motilal Oswal Financial Services, Edelweiss Financial, Geojit Financial Services etc will remain in limelight. According to Angel Broking, GST implementation is expected to be neutral for the cement industry. Earlier, cement was taxed at 12.5 per cent excise and VAT rates between 12.5-15.5 per cent. Under GST, the cement will be taxed at 28 per cent, which is nearly the same as the current tax structure Will GST lead to the rise of passive investing in India. That is a tough call, but not entirely off the mark. Passive investing is all about indexing your portfolio performance to an index like in the case of an index funds and equity ETFs. The additional 5-6 bps cost created by GST will make a further case for these passive funds. The shift may not happen immediately when alpha opportunities are still available aplenty. However, once the market gets more volatile and alpha opportunities less frequent, then passive investing may see a revival of interest.
- · An impact on equity investing is definitely on the cards in the post-GST scenario. The case for equities and the case for long term investing could actually get stronger due to GST. But GST may actually force money managers to tweak their strategy in the light of the emerging opportunities and also in the face of higher cost of transacting. This will apply to fund managers, PMS service providers and also to financial planners. It may be time for a strategy shift!
