GST impact: Companies to feel pinch of hefty phone bills, higher construction costs

The stock market rallied early on Friday as investors appeared pleased with the GST rates on goods announced on Thursday, but as the trading session progressed, stocks gave up their gains and ended flat. The consensus was that it was a mixed bag for India Inc. With clarity still awaited on various aspects of GST, companies are yet to quantify the impact on their profitability. Also, the transition will not be smooth and some disruptions are expected.

Here’s a first-take analysis of the hits and misses for corporate India:

Turbulence for airlines

Economy class air tickets are set to get cheaper under the GST, but business class tickets will get costlier. Currently, the service tax on air tickets is 15 per cent. But with a 60 per cent rebate on economy class tickets and 40 per cent on higher ticket classes, the effective service tax rate came to 6 per cent on economy class tickets and 9 per cent on business class tickets.

Under the GST regime, transport services, including economy class airfare, will be taxed at 5 per cent. That’s lower than the current service tax rate. On the other hand, higher classes of tickets will face a GST rate of 12 per cent, which is higher than the current rate.

The Indian aviation market is highly price-competitive, especially in the economy class.

The lower GST rate should help bring fares down marginally. Airlines will likely be able to pass on the higher rate under GST to passengers in higher classes, who are not so price-sensitive. But if the price hike is not passed on, airlines such as Air India, Jet Airways and Vistara, which offer such seats, could be impacted financially.

Neutral for oil marketers

Kerosene sold under the public distribution system (PDS) and liquefied petroleum gas (LPG) for domestic use will not see a change in prices under the GST regime.

But non-PDS kerosene and non-domestic LPG could see price moves. Currently, excise duty on non-PDS kerosene is 14 per cent, while the sales tax varies from 0-25 per cent.

On non-domestic LPG, excise duty is 8 per cent while the sales tax varies from 5-15 per cent. These products are now in the 18 per cent GST slab.

Oil marketers such as Indian Oil, HPCL and BPCL are unlikely to be affected by this, since they will likely pass on the change in prices on non-PDS kerosene and non-domestic LPG to customers.

Any change in PDS kerosene and domestic LPG prices will continue to be shared among the government and the oil companies under the subsidy sharing mechanism.

Construction costs to rise

The GST rates for the real estate sector are yet to be decided, but the rates on inputs — cement, tiles and sanitaryware — are on the way up. Cement and other construction materials such as tiles, ceramics and sanitaryware will now invite 28 per cent tax against 24-25 per cent earlier.

This is a dampener for the construction and real estate industry, which recently felt the impact of a surge in cement prices.

Stocks of Kajaria Ceramics, HSIL (Hindustan Sanitaryware & Industries), Somany Ceramics could remain under pressure on concerns about whether they can pass on the cost increase to customers.

Moreover, if cement players jack up their prices, construction costs will go up for real estate players like Godrej Properties and Prestige Estates – even if only marginally.

But given this expected rise in cement demand, the implementation of the new tax slab will not affect the operation of the larger cement companies such as Ultratech and Ambuja Cement over the long term as they will be able to pass on the hike in cost to their customers.

Telecom firms on hold

After the entry of Reliance Jio, the telecom sector has come under severe stress. Key players such as Bharti Airtel and Idea cellular have reported revenue and profit declines for FY 2016-17. The implementation of a higher GST rate of 18 per cent could stress the business of the industry players even more for a short period. But since the subscriber base of telecom companies has risen despite frequent upward revisions in service tax, the long-term impact is likely to be negligible. The biggest challenge that the operators will face relates to multiple registration and compliance procedures.

For consumers, it will mean bigger phone bills and costlier mobile recharge. For instance, if your phone bill now comes to about ₹500, under the GST regime, you will henceforth pay ₹90 as tax, against ₹75 earlier (15 per cent service tax).

Brakes on premium bikes

As far as bikes go, the GST rate remains at 28 per cent, with no cess on bikes with up to 350-cc engine capacity. Currently, all bikes invite an excise duty of 12.5 per cent, VAT of 12.5 per cent, a national calamity contingency duty of 1 per cent and a CST of 2 per cent, taking the total indirect taxation to 28 per cent. Hence, the impact of GST is largely expected to be neutral on the mass market and on executive segment bikes.

Given that two-wheeler demand is yet to recover from the negative impact of demonetisation, this is good news for listed players operating in this space, such as Hero MotoCorp, Bajaj Auto and TVS Motors. However, a cess of 3 per cent is to be levied on premium bikes, with engine capacity of over 350 cc. Royal Enfield is a big listed player in this segment. Bajaj Auto, Honda and Suzuki too have a presence in this segment.

(With inputs from Anand Kalyanaraman, Muthukumar K, Parvatha Vardhini C, Bavadharini K S)

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