The Goods and Services Tax (GST) Council cut tax rates on as many as 88 items on Saturday. This includes items such as refrigerators, small screen TVs, washing machines, hair dryers, vacuum cleaners, paints and footwear. The revised rates shall be effective from 27 July 2018.
Here are five things to know about the new changes:
The GST council has provided a market stimulus to the industry through the GST rationalisation. The GST council has announced a total exemption of tax on sanitary napkins from the original 12%. However, companies will not get input tax credit for this. Tax on items such as handbags, jewellery boxes, glass art ware and handmade carpets is set to decrease from 12% to 5%. Similarly, the GST rates on bamboo flooring, zip fasteners and hand-operated rubber rollers are down to 12% from 18%.
The paints industry is a big beneficiary of the GST rate cut. Paints and varnishes, including enamels rate, was cut to 18% from 28%. This is likely to enhance the profitability of Asian Paints and other companies. According to our estimates, this rate cut would drive a 10-15% earnings upside for the paints companies on an annualized basis.
In FY2010 too, Asian Paints witnessed a 92% growth in Profit after Tax (PAT) after a similar indirect tax cut. While companies may pass on the rate benefit to customers, earnings could be boosted by higher volume growth and by increasing the pace of releasing premium products. You can find more details in the research report here. All paint companies witnessed gains in share prices on Monday.
The overall impact on the fiscal deficit is anywhere between Rs 10,000 crore to Rs 15,000 crore, according to press reports. While this may reduce significantly if overall sales get a boost as a result of the rate cut, it is important to keep an eye on this data. A year ahead of general elections, the government has announced a hike in minimum support price for farmers and these GST rate cuts.
The consumer durable industry experienced the biggest benefit of the latest rate cuts. India’s consumer durables industry has a market size of Rs 72,000 crore. The industry was affected by the 28% tax on white goods. As a result, it experienced only a 7.5-8.5% growth during 2017-18. Rates for popular white goods including refrigerators, shavers, electric iron, hair dryers, juice mixers and water coolers are cut by 10% from 28% to 18%.
With the new changes in GST rates, the industry is expected to grow in double digits during the current fiscal year according to Consumer Electronics and Appliance Manufacturers. As per the revised rates, only 35 items from the original 226 shall remain in the 28% bracket. Find out more about GST impact on white goods in this research report here.
The stock market gave a ‘thumbs up’ to the decision with benchmark indices gaining ground despite a flat to negative trend across Asia. In response to the high rate cuts on white goods, stocks of consumer durable companies were trading higher with around a 5-8% gain in early trade on Monday morning. The GST council’s move to cut rates in addition to the government’s victory in the no-confidence motion vote could act as positive sentiments and push the stock market to a higher level in the near term according to experts on Dalal Street. Read how GST rates affect investors here.
There are still many GST rate slabs at the moment. However, the council’s decision to slash rates means that very few items remain in the 28% category. This move is generally considered to be positive for discretionary consumption according to experts.
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