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GST Council meet: Relief for cars, hotels likely; sin goods may be at receiving end

Investors may still welcome any tax cuts ahead of the festive season, said analysts.

Updated: Sep 17, 2019, 01.08 PM IST
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Some states feel the economic slowdown could be due to cyclical and structural issues.
NEW DELHI: A host of consumer-facing sectors are in focus in the runup to Friday’s GST Council meeting, where the indirect tax panel may announce some reduction in levies on cars, biscuits and some other consumer goods to spur demand ahead of the festive season.

Sectors such as hotels, cement and textiles are also hoping for some GST relief.

On the other hand, the so-called sin stocks could be at the receiving end, as the council may try to partly cover the revenue losses for states by raising the cess on sin goods such as tobacco products.

Analysts said many sectors are facing a cyclical slowdown, and it may not be easy to reverse it.

This is something Bajaj Auto MD Rajiv Bajaj has also said about the auto sector recently. Maruti Chairman RC Bhargava also admitted that a temporary GST rate cut won’t make much of a difference, as higher taxes on fuel and a hike in road and registration charges by state governments have created a higher burden on car buyers.

That said, investors may still welcome any tax cuts ahead of the festive season, said analysts.

“If the GST rate on cars is reduced to 18 per cent from 28 per cent, it can create demand in the near term,” said Prayesh Jain, Lead Analyst for Institutional Equities at YES Securities.

“But if the cut is only till March 31, 2020, FY21 could see another slowdown when BS-VI price hike comes up, leading to a sharp rise in car prices. A longer-term approach is required. Two-wheelers below 150cc and CVs are not luxury items, and hence, they can attract lower GST rates,” he said.

UBS analyst Sonal Gupta in a note said demand for two wheelers could improve with modest rate cuts, but its impact on car and truck demand is less certain. If these rate cuts are only for a limited period, it can advance buying, but unlikely to create a sustainable cycle.

On Tuesday, shares of India’s largest car maker Maruti Suzuki traded 0.72 per cent lower at Rs 6,366. The stock is down 15 per cent year-to-date (YTD). Mahindra & Mahindra traded 1.4 per cent lower at Rs 529.70, down 34 per cent YTD. Tata Motors declined 1.12 per cent on Tuesday and 26 per cent YTD.

Tyre stocks were trading mixed on Tuesday. Year to date, JK Tyre (down 33 per cent), CEAT (down 29 per cent), Apollo Tyres (24 per cent), (MRF (down 12 per cent) have all seen sharp falls.

In case of biscuits, the sector is demanding a 5 per cent GST rate against 18 per cent at present with a price tag of Rs 100 per kg or below.

Mayank Shah of Parle says biscuits below Rs 100 per kg are being subjected to higher GST rate at 18 per cent, even though this category of biscuits was actually exempted from excise under the earlier tax regime.

“These are the biscuits consumed by the middle class and lower middle class. Substitutes like rusk are all subject to 5 per cent GST, even though the MRP is much higher. Rusk is typically sold at Rs 150 a kg, whereas biscuits cost Rs 100 per kg,” Shah told ETNOW in an August interview.

In the case of hotels, states are open to a GST cut on hotel tariffs of Rs 7,500 and more to 18 per cent from 28 per cent or to raise the threshold for the higher tax bracket, a government official told ET. Goa and Rajasthan, which generate substantial revenue from tourism, have been pushing for relief on this front.

“We are expecting GST cuts for hotel industry and auto. There are demands for GST cuts from across sectors, but other than these two, I see little chances of relief for others. I expect some ‘cess’ hike tobacco products, as the Centre will have to compensate states somehow,” said G Chokkalingam, founder of Equinomics Research & Advisory.

Most hotel stocks traded with losses on Tuesday. Hotel Leelaventures (down 55 per cent), Lemon Tree (24 per cent) and Taj VVK Hotels (down 16 per cent) are down up to 55 per cent so far this calendar.

The GST Council has an arduous task of addressing the macroeconomic issues to fix the economic slowdown and critically evaluate the plea for GST rationalisation, especially for sectors such as automobiles, cement, textile, which have witnessing a consistent slowdown in demand and consequential loss of employment, said Ayush Mehrotra, Tax Partner at Khaitan & Co.

Mehrotra said GST was introduced to widen the tax base and improve tax collection. It would be prudent to ignore the short-term deficit in (revenue) targets due to rate rationalisation, and focus on improving (GST) collections in the long term on account of incremental demand, he said.

Some states feel the economic slowdown could be due to cyclical and structural issues and GST rate cut may not lead to higher consumption, said Deepak Jasani, Head Retail Research at HDFC Securities.

“Some states are worried that the GST rate cut may not be fully passed on to consumers and even if it is done, prices could be increased after some time. The directorate general of anti-profiteering has so far investigated about 125 cases of alleged profiteering and found 60 per cent of sellers at fault,” Jasani said.

Amid a shortfall in tax revenues, a GST rate cuts would force the panel to broaden the base of goods and services on which cess could be levied or increase the cess on some other items, he said.

Meanwhile, considering the widespread leakages and evasion in the GST collections, it is likely that a slew of measures may be announced to improve collections and plug the leakages, said Manish Mishra, Partner J Sagar Associates.

“Also, the compensation framework for the States may get reviewed due to recurring short-falls and increasing losses to the States. Review of the new return mechanism set to be launched from October and extension in the due dates for annual compliances for 2018-19 should take place. Fully electronic and automated refund module may be introduced to speed up the Export refunds process,” Mishra said.

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