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GST: Auto likely to face the brunt of 28% tax bracket plus cess

Consumer goods and life-saving drugs to get cheaper

Arnab Dutta Sheetal Agarwal Aneesh Phadnis & Shubham Parasher  |  New Delhi/ Mumbai 

India moved a step ahead in adopting its biggest tax reform since Independence, namely, the Goods & Services Tax (GST), with the GST Council fixing rates of 1,211 items today. The good news is that consumer goods and life-saving drugs are likely to get cheaper, while auto may face the brunt of higher tax incidence as cars are likely to fall in the 28 per cent tax bracket plus cess. Of the 1,211 items, 7 per cent are on the exempt list, 14 per cent will be taxed at 5 per cent, 17 per cent will be taxed at 12 per cent, 19 per cent will be taxed at 28 per cent and the rest will be taxed at 18 per cent. Hair oil, toothpaste and soap makers have reason to cheer since these products will be taxed at 18 per cent, lower than the present effective rate of 23-24 per cent. Burhan Wani more dangerous dead than alive: Derek O'Brien "The announcement of 18 percent GST rate for soaps, toothpastes and hair oils is along expected lines and is certainly welcome. It will have a positive impact on our business. That said, we are still awaiting clarity on categories like health supplements, shampoos and packaged juices," Sunil Duggal, chief executive officer, Dabur India, said. Duggal expects packaged juices to remain in the 12 per cent tax bracket, while packaged foods, a growing business for many players including ITC, remains unclear. Again, while traditional sweets (mithai), sugar, edible oil, tea and coffee will be taxed at five per cent, instant coffee has been kept out of this bracket, it is reliably learnt. However, a lower tax bracket may not prove to be beneficial for all manufacturers. Companies enjoying excise duty sops may land up paying higher taxes under the new regime, at least two industry executive said on condition of anonymity. Companies from Hindustan Unilever (HUL) to Patanjali, Dabur, Marico, Jyothy Labs, Emami and Bajaj Corp, among others, have recently set up plants in Assam to avail of tax benefits.

Earlier, states like Himachal Pradesh and Uttarakhand offered similar benefits to attract investments. Under the GST regime, goods produced in such areas will no longer enjoy substantially lower tax rates, tax experts said. Companies, they said, may need to adjust their production capacities and realign geographical distribution of their manufacturing to bring down the impact of GST. Despite this, consumer goods analysts remain optimistic. "We expect GST rates to be beneficial to companies like HUL as their indirect taxation currently is 26 per cent," Abneesh Roy, senior vice-president, research, institutional equities, Edelweiss, said. "HUL, Colgate and Godrej Consumer will benefit due to lower incidence of tax," Sachin Bobade, consumer analyst at brokerage Dolat Capital said. "These companies are likely to pass on the net benefits from lower rates to consumers, but the efficiencies would be retained or even reinvested in the business," he said. According to industry sources, the government has fixed GST rate for life-saving drugs at five per cent. Currently, these drugs enjoy tax exemption either at central or state level. Formulations attract average nine per cent tax rate while active pharmaceutical ingredients (raw materials) are taxed at 12 per cent. "The proposed five per cent tax rate for life-saving drugs would be neutral. The pharmaceutical industry has been anticipating 12 per cent tax rate and ideally all pharma products should be placed at 5 per cent rate," said Kirti Oswal, partner, BSR & Associates. "A rate lower than 12 per cent will be a pleasant surprise as it will benefit the poor which is the focal point of this government. We hope that the industry would not be left with inverted duty structure," said D G Shah, secretary general of Indian Pharmaceutical Alliance. "National Pharmaceutical Pricing Authority should announce revised ceiling prices for drugs under price control immediately so as to enable the companies to plan better," said Deeepnath Roy Chowdhury, president of Indian Drug Manufacturers Association. In the case of auto, the government, say sources, is yet to clarify on tax levels. "The 28 per cent rate has not been officially announced yet, it could even be around 18 per cent," Jinesh Gandhi, auto analyst, Motilal Oswal said. "Though, if we consider 28 per cent as the tax rate for small cars, there will be no material difference in consumer cost in metro cities like Mumbai and Delhi where octroi and other taxes like entry tax is levied. However, in other cities, cars may become cheaper by 2-3 per cent," he said. Cereals, incidentally, have been kept under the "exempt" category and so is jaggery, a byproduct of sugarcane, implying that prices of these essential commodities could fall. Consumer durables such as air conditioners and refrigerators will fall in the 28 per cent bracket, lower than the 30-31 per cent they are charged today, while 'sin' products such as tobacco (cigarettes), pan masala and luxury cars will attract 28 per cent tax plus cess of 290 per cent, 135 per cent and 15 per cent, respectively.

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First Published: Thu, May 18 2017. 22:44 IST
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