As the implementation of GST is just around the corner, it’s time to shift our focus towards the nitty-gritties involved in smooth functioning in the post-GST era. This analytical piece by Manish Saigal, MD, Alvarez & Marsal (A&M), aims to help you take the right route by discovering the treasure chest that the GST beholds…
Manish Saigal, A&M
Now that roll-out date for GST is almost certain, industry experts and advisors are taking a closer look on potential impact of GST in medium and long term. The focus has now shifted from policy guidelines to implementation framework. We believe that GST impact on various industries can be classified under following key parameters: Effective tax rate – pre-& post GST; industry structure – structural impact on smaller companies in the industry; supplier industry – impact on supplier base; distribution – existing distribution network and GST impact; and logistics, especially warehousing footprint. Our view across various industries can be summarized as follows:
Automotive
Effective tax rate is expected to be lower post GST. Existing effective tax rate ranges from 28 - 32% on small cars, two-wheelers & commercial vehicles to over 42% for sedans & over 50% for SUVs. GST rate on automobiles is currently expected to be 28% and additional cess for luxury cars. Impact on supplier base is expected to be positive due to following reasons: With no additional 2% CST, interstate suppliers would be more price competitive and interstate procurement would increase. Supplier base is not required to setup shops near OEMs to claim VAT credit, resulting in lower capital expenditure. Class A / B suppliers would benefit more. Companies offering job work and tooling could benefit in medium-term due to clarity in tax regime.
FMCG
Post GST, effective tax rates are not expected to change significantly. However, service tax on Rent (0.2-0.7% of Revenue) and distribution expenses (~4.7% of packaged foods, home & personal care – 6.8%, Cold beverages – 10.1%) cannot be currently set off against output VAT liability. Post GST, this set off will be possible. There are significant changes expected in distribution and logistics. Distribution is expected to get streamlined due to compliance standards, leading to emergence of super and national distributors. Currently large FMCG companies sell goods through 30-35 regional warehouses. This footprint is expected to come down to 20-25 over next 2-3 years post GST, thereby reducing supply chain costs significantly.
Consumer durables
Implementation of GST could result in the reduction of effective tax rate of low category appliances (existing effective tax rate – around 24-32%; GST rates – light articles - ~18%; heavy articles – 28%). GST is expected to impact logistics in consumer durable industry. As bulk of finished products travel to spokes (state WHs) from mother hub, there is a scope to reduce the number of spokes post GST, as goods could be transferred from mother WH to C&F agents directly. State WH area is expected to decrease by 7% owing to safety stock and layout utilization benefits of consolidation.
Textiles/Apparels
Effective tax rate is expected to have a negative impact on the natural fibre industry. This could result in competitiveness of synthetic fibres. The industry structure is expected to favor organized participants post GST: The current organized share is 36%; cost of compliance is expected to increase share of organized players. Manmade fibres would be more cost competitive due to input credit availability. This would potentially lead to substitution of natural fibres with manmade fibres.
Chemical industry
Current rate of excise duty on most chemicals is 12.5% with exceptions for products like animal or vegetable based fertilizers, which are exempted. Effective tax rates for paints, industrial & construction chemicals to be reduced from 24 – 26% pre-GST to 18% post-GST. Service related expenses including rent, contract labour & distribution cost account for 4 – 5 % of sales value. Implementation of GSTwould result in creditability of input tax on this. Cost of compliance would be high for small companies in segments such as plastic products & specialty chemicals, resulting in consolidation in the industry.
Modern retail
Service related expenses like rentals would currently account for 5-8% of sales for top modern retailers. The service tax paid on this input will be creditable post GST. As service tax on key input costs like rent / contract labour can now be set off against output VAT liability, modern retailers would benefit.
Pharmaceuticals
Pharma industry is expected to witness significant impact in distribution and warehousing: Distributors currently restrict themselves to a state due to CST and they could grow bigger and consolidate across states. Currently pharmaceutical companies have over 30 state warehouses (15000 – 25,000 sqft) and these are expected to consolidate post GST.
IT & Telecom
Post GST, single national distributor (ND) could serve multiple states from mother hub, hence scope to consolidate ND. Post GST, retail share of modern retail players is expected to increase. Logistics can also undergo some changes, which can be summarized as follows: As bulk of finished products travel to state WHs, there is a scope to rationalize the number of WHs post GST as goods could be transferred from mother WH to C&F agents directly. State WH area is expected to reduce by 3% post GST and further 19% in case of improved racking.
Light electricals
Approx. 75% of the industry is organized, which is further expected to increase post GST. Tax compliance is expected to increase in supply chain, large light electrical firms will use input tax credits from suppliers. As bulk of finished products travel to regional WHs from factory/mother hub, there is a scope to consolidate WHs post GST.
Capital goods
Effective tax rate post GST is expected to come down. The current excise duty on capital goods is 12.5% and the VAT is ~4%. Post GST, the tax is expected to be 12%. GST is expected to impact the supplier industry for capital goods. With a higher requirement of supplier compliance to avail of input credit for GST, they are expected to become more organized. With 2% CST removed for interstate movement, top vendors would become more cost competitive and the suppliers would be able to consolidate.
What does the future hold?
Clarity on effective tax rates would emerge in the next few weeks. Industry participants are investing significantly to enhance GST readiness. Focus is now expected to shift from design to implementation capabilities.
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