Strategy: GST: The finishing line is finally here - Kotak

GST: The finishing line is finally here. We believe GST is all set to be implemented on July 1, 2017 with (1) the GST Council finalizing the GST rates on almost all goods and services and (2) 12 states passing the state GST laws; more will do so over the next few weeks. The government has followed a multi-pronged approach to prepare for the implementation of GST. However, we are less sure about the readiness of companies, especially the smaller ones, to adopt GST in a smooth manner.

GST rate on most services at 18% versus the current 15%

The GST rates of various services broken down by key sectors and sub-sectors. As can be seen, the government has put most services in the 18% category. As in the case of goods, the government has exempt certain mass-consumption items (education, healthcare, transportation on local and metro trains) from GST or kept the GST rate at 5% (transportation in general). However, the 18% tax on communication is on the higher side, in our view. Also, the GST rate of 28% on cinema tickets for multiplexes and 12-40% GST rate on F&B items (blended 11% currently) will be negative for the listed multiplex stocks versus expectations.

GST rates on most goods in the range of 12-28%

The GST rates on various goods broken down by key sectors and sub-sectors. We have already covered this in detail in our May 19 report. The government is yet to decide on the rates for two important sectors—textiles (apart from branded garments at 18%; the definition of branded garment is not clear since it can technically include private labels from the unorganized sector too) and precious metals and jewelry. The government will decide on the rates for these two categories of goods on June 3.

Limited impact on inflation as GST tax rates on common items are below current rates

We see limited impact on CPI inflation due to the changes to tax rates from July 1 following the implementation of GST as the government has (1) exempt fresh food items completely from GST, same as in the current taxation system, (2) kept the rates on edible oils and processed foods items at 5-12% (with the exception of aerated waters), (3) exempt services such as education and healthcare completely from GST, same as under the current system and (4) kept the rate on transportation at 5% in general. The aforementioned goods and services account for a large share of the CPI basket.

Interesting to see how the government handles tax on gold, precious metals and jewelry

It would be interesting to see how the government handles the vexatious issue of tax on gold and jewelry since (1) the industry vehemently opposes any changes to the taxation structure and (2) gold imports have surged of late. In our view, the government should separate the two 'roles' of gold between savings and consumption and tax the 'roles' separately to achieve its objectives of (1) higher disclosures on purchase and sale of gold and (2) higher household financial savings. Accordingly it can (1) exempt 'paper' gold (gold bonds) completely from tax as is the case for other financial savings products (other than any GST on transaction fees), (2) tax bullion at a rate of 5% to discourage savings in the form of physical gold and (3) tax jewelry overall at 12% GST or making charges (service) separately at 18% GST.

Source : Equity Bulls

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