Apart from tonnage shifts in commercial vehicles,

near term impact of GST dependent on GST rate

Published Date: 08-Aug-2016
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GST to lead to the hub and spoke model gaining prominence+, and a faster shift
towards larger MHCV trucks in primary routes. The spokes will now be catered largely
by ICVs aiding to overall MHCV sales over the long run However, better fleet
productivity will result in lower requirement for commercial vehicles. Near term impact
dependent on GST rate.

GST will lower effective taxes; organised sector to gain;

logistics costs to fall
After a decade-long struggle, the Goods and Services Tax (GST), which has already been adopted
by 160+ countries in some form or the other, sailed over the first of three hurdles when the Rajya
Sabha unanimously adopted the Constitution Amendment Bill to facilitate its legislation.
Coming up next is the GST Council, comprising the Finance Minister and nominated State Finance
Ministers, which is expectd to be formed in 2 months to deliberate on the specific features of the tax
including the final rate structure, exemptions, threshold limits and date of implementation on
petroleum products.
Further, the Constitution Amendment Bill also needs to be passed by at least 15 state legislatures
(50% of the states) before becoming an Act. Then the Centre and the states will have to pass their
GST

laws

and

turn

India

into

unified

market.

So which segments stand to gain and which won"t with the implementation of GST?
CRISIL

Research

took

look

at

what

this

means:

Heralding transparency, reducing the cascading effect of taxes

GST is expected to bring uniformity in taxation and reduce its cascading effect leading to cheaper
goods and services. Currently, excise and value-added tax (VAT) cannot be offset, so they cascade.
In addition, VAT credits cannot be carried across states. Both these characteristics would change

under the GST regime.

A dual-structure is on cards where the Centre would levy and collect the Central Goods and Services
Tax (CGST), and states would levy and collect the State Goods and Services Tax (SGST) on all
transactions within a state. The states will be able to fix their SGST rates above the floor rate, but
within a narrow band.
Input tax credit of CGST would be available for discharging the CGST liability on the output at each
stage. Ditto SGST.
No cross-utilisation of credit (across CGST and SGST) would be permitted. The Centre would levy
Integrated Goods and Services Tax (IGST) on inter-state supply of goods and services, which might
be a combination of CGST and SGST. As for IGST, inter-state sellers can avail of input tax credit.
The proposal for additional tax of up to 1% on the supply of goods to be levied on inter-state trade for
2 years is on its way out, which will reduce its cascading effect and maximise the benefits from GST.
As per the Constitution Amendment Bill, all goods and services (except alcohol for human
consumption) will be brought under the GST purview. While petroleum/petroleum products have been
included in the framework, GST would be levied only upon the Council"s recommendations, implying
that present taxes (excise duty, sales tax, CST) would continue to be levied on these products. For
tobacco and tobacco products, taxes imposed by the Centre would be levied over and above the
GST.
All major indirect taxes levied by the Centre and the States will be subsumed in the CGST and the
SGST

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Source: CRISIL Research

Current exemptions on certain goods to continue

Multiple exemptions exist under the present tax system - the Centre has ~300 items exempted from

central excise duty, while the States (together) have ~90 items exempted from VAT. These will be
merged into a Final synchronized exemption list under the GST regime. While imposing the GST on
essential goods that are currently exempted from either excise or VAT or both would be regressive in
nature as their prices would shoot up, the more the exemptions that are retained the higher will be
the standard rate. Hence, the government must limit exemptions to essential goods in an ideal GST
regime.

The proposed GST rate structure and revenue neutral rate

The Chief Economic Adviser-led committee also proposes a 3-rate structure -- low, standard and
high.
Estimates of RNR and GST rates

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Source: CRISIL Research

Impact on India Inc:

We have assumed a 12-18-40 rate structure for assessing the impact on various sectors in this note
(option 4)
1. Prices of goods to decline, cost of services to increase, exports to get a boost: The effective
indirect tax incidence is expected to decline post the implementation of GST due to removal of the
cascading effect arising from the non-availability of input tax credits across the value chain and
between states and removal of tax-on-tax (eg. VAT levied on excise inclusive price). The standard
excise duty of 12.5% and VAT of 12.5-15% along with cess, entry taxes and CST take the effective
tax rate up to 26-30% in the current system which will drop to a standard rate of 17-18% under the
GST. However, the prices of goods that are currently exempt from excise duty or sales tax or are
subject to concessional rates are set to increase as the list of exemption under the GST will be
lowered. Since GST is a tax on consumption (destination-based), exports would be zero-rated, i.e.
export prices would not include any taxes. Currently, exports are reimbursed for central indirect taxes
(excise and customs duties) but don"t get full offsets for CST and certain state-level taxes such as

entry taxes and octroi. Post GST, this non-rebated indirect tax induced distortions would be removed,
enhancing competitiveness of Indian exporters. Tax on Services will go up to 18% standard rate from
14% currently.
Based on our analysis below, GST will be largely a beneficiary for Automobiles, Cement, Media and
Entertainment sector. GST will have a negative impact on service industries such as restaurants and
quick service restaurants (QSR). Impact of GST for hotels will be depend on its location whereas for
real estate it will depend on its treatment with regards to agreement value.
2. Better operational efficiency due to improvement in supply chains: Since the GST subsumes
most of the state-level taxes, it would reduce the need for reconciliation at state borders. This could
lead to a dismantling of the web of check-posts around the country, thereby speeding up the
movement of goods and reducing logistics and inventory management costs, which are very high in
India vis-a-vis other countries.
CRISIL Research expects the rollout of goods and services tax (GST) to bring down the logistics
costs of companies engaged in the production of non-bulk goods by as much as 20%. Savings will
accrue as a result of gradual phasing out of the central sales tax (CST), consolidation of warehouse
space, faster transit of goods since local taxes will be subsumed into the GST and as state level
check posts will be dismantled.
Indian corporate spend an average of 6-8% of sales towards logistics. GST is expected to a costs
savings to the tune of 1.0-1.5% of sales over a 3-4 year period. Eliminating delays at check posts will
yield additional savings of 0.4-0.8% of sales, which will take the overall logistics costs savings to upto
1.5-2.0% of sales for companies. These cost savings are, however, more likely to be gradual and
back ended as corporates will have to realign their supply chain while ensuring minimum business
disruption.
Sectors that have set up warehouses due to tax considerations like consumer durables,
pharmaceuticals, FMCG, and cement will be key beneficiaries. However sectors like automobiles,
which have largely set up warehouses purely for logistical considerations (due to the large stockyard
space required), the extent of consolidation will be limited reducing benefits. Sectors dealing with
transportation of bulk commodities like iron ore and coal will have limited impact.
3. Narrowing differentials between unorganised and organised players: GST has an in-built
incentive of self-policing. Since input tax credit will be available for all taxes paid earlier in the value
chain, firms would require evidence of compliance from the preceding links to claim set-offs. Thus,
they would prefer sourcing inputs from compliant firms. This could increasingly bring unorganised
players under the tax net, thereby reducing their price competitiveness vs. organized players.

Sectoral impact:
Automobiles and Auto Ancillaries - Positive

Within passenger vehicle industry, mid-size segment (1,200-1,500 cc) will be the largest
beneficiary with an estimated duty decline of nearly 20%. Small cars segment could see a
price benefit of about 10% and luxury cars & UVs segment to get a limited ~5% benefit.

Given the intense competitive scenario & players" struggle to maintain the market share
coupled with strong financials of the companies, CRISIL Research expects the players to
pass on the tax benefit to end consumers.
o

In turn, we anticipate a consumer preference to shift towards midsize segment

hatchbacks led by this shrinking gap between small cars & mid-size segment.

Moreover, increasing affordability, lower cost of ownership and ample launches in

the mid-size segment will support the change in consumer preference as well.

On the top end vehicle front, we do not foresee a significant impact on demand as
price does not particularly dictate the purchasing decision for the segments.

Two wheeler industry will have a similar impact and prices will drop by about 8-10%. This will
translate into better demand for price sensitive 100-125 cc segment. 150+ cc vehicles are
not estimated have a significant impact.

Tractors are currently levied a 0% central excise duty and a 4% VAT. Under the new GST
regime, central GST will remain 0% and state GST is anticipated to be in the same range as
current VAT. So we do not expect much change in the demand scenario for tractors.

Commercial vehicle, which get subjected to Central Excise (12.5%) and VAT (12.5%), is
expected to benefit marginally depending on the RNR adopted.
o

GST will lead to the hub and spoke model gaining prominence, and a faster shift
towards larger MHCV trucks in primary routes - to 37 tonne from 31 tonne and from
25 tonne multi-axel vehicles (MAVs) and 40 tonne trailers from 35 tonne.

The spokes will now be catered largely by ICVs aiding to overall MHCV sales over
the long run

However, better fleet productivity will result in lower requirement for commercial
vehicles

Auto ancillary industry"s effective tax rate which is currently at 28-30% is expected to come
down to 18% upon implementation of GST. However, this benefit will be passed on to OEMs,
which will eventually drive expansion in auto demand. It is also expected to improve the price
competitiveness of the organised players, especially in products largely sold in the
aftermarket segment (eg batteries - where share from after-market is greater than 50%).

Cement - Positive

With GST implementation, we expect the overall tax incidence on the sector to potentially decline.
Typically, indirect taxes in the sector are close to 28-30% which would potentially come down post
GST implementation to the effective tax rate. Further, the sector will also benefit from expected
decline in logistics costs with consolidation of warehouses especially for large players with a panIndia presence.

Media & Entertainment - Positive

Media and Entertainment Multiplex- Positive

Multiplexes would be a key beneficiary of GST. At present, multiplexes pay local state taxes like
entertainment tax and VAT on overall revenues including food and beverages. In addition, they also
pay service tax on projector equipment, utility, security, housekeeping and other cost which are paid
to central government. The blended average rate for multiplex players would be ~24-25% across the
country which would reduce to ~18%.

Media and Entertainment DTH - Positive

DTH players pay service tax of 14.5% and entertainment tax of which varies from various states (in
range of 2% to 35%). Their indirect tax outgo is ~23-25% which would reduce to ~18%.

Media and Entertainment Broadcaster - Negative

Broadcasters pay indirect tax in range of 14-15% which would increase to 18% post implementation
of GST.

Retailing - Positive (especially organised retailers)

Rentals which is one of the major costs for retailers attracts service tax of 14.5%. The retailers cannot
set-off this costs like the other industries as the companies trading goods (retailers), which pay VAT,
are not allowed to claim credit for the service tax paid on different items since they have no central
tax against which this can be set off. This creates additional operating expenses for the players.
However, passing of GST bill will now allow these indirect taxes (service tax) on lease rental to be set
off. This will help in expansion of profitability margin. Further, the bill will also help organised retailers
as the single tax will bring majority of transactions of unorganised players under the tax net and
thereby reduce the price gap in retail prices of various items.

E-commerce is neutral
Bill is expected to bring some clarity in online business. It will also open new markets for online
players who face complexities of entry tax and other processes while entering in specific states.
E-commerce players have large number of sellers listed on their platform. These sellers will have
cash-flow issues as they will have to claim refunds for tax paid on inputs , which e-tailers will not be

able to account for. Thus, this will increase the compliance burden for e-commerce players. Further,
any payment made to a supplier would be subject to tax collected at source at the notified rate. This
might

create

rift

between

sellers

and

e-commerce

companies.

Restaurants and QSR - Negative

Restaurants and Quick Service Restaurants (QSR) currently attract Service tax as well as Value
Added Tax (VAT). While Service tax is currently charged at 6% (taking into account the abatement
rate of 60%, Swacch Bharat Cess and Krishi Kalyan Cess), VAT is charged at 12.5% for food items
(including non-aerated, non-alcoholic drinks) and at 25% for aerated drinks. We believe that with the
exclusion of aerated drinks, the impact on the restaurants and QSRs will be negative only if the GST
rate is higher than 18%. However, with aerated drinks likely to be clubbed under the 'Luxury category'
and attract GST at 40%, the impact on this segment will be negative.

Textiles - Marginally negative

For the textile sector, a major proportion of sales is derived from exports, which will continue to be
zero-rated. Effective tax rate for the textile sector is 6-7%. If it is not classified as goods of basic
necessity and the tax rate is increased, it will have a negative impact on the players catering to the
domestic segment.

Telecom Services - Marginally Negative

The mobile bills for both prepaid and postpaid subscribers may go up if the rate for GST is set above
15% (the service tax (including KKC and SBC) currently paid for the mobile bills). Also, the way in
which telecom circles are classified is not aligned with the geographical boundaries for some of the
states and UTs. For e.g., MP telecom circle also includes the state of Chhattisgarh; Delhi circle
includes neighboring cities of Noida and Gurgaon which fall in the geographical boundaries of UP
and Haryana respectively. If different rates are imposed by such states, the price of a prepaid pack
will vary across different regions in a same circle, leading to pricing discrepancies and consumer
complaints.

IT Services - Marginally Negative

IT companies at present have a relatively simplified tax regime wherein, there is a single point of
taxation which is the central service tax. Under the new GST regime, there is not much clarity on the
slab applicable to the IT Companies and compliance might come under Central GST (CGST), State
GST (SGST) and Integrated GST (IGST). This could lead to multiple taxation points, which will lead
to increased costs for players as invoicing will now cost more. On the hardware front, movement will
become smooth. Currently, duty on manufactured goods ranges from 14-15%. A rate less than this
would reduce costs for certain hardware components.

Renewable Energy - Negative

Implementation of GST, assuming 18% rate, will increase solar power project cost by 13-15
o

Solar modules, which account for 55-60% of total capital cost, and are largely
imported, there exists no customs duty. Also, VAT and other levies like entry tax and
excise duty, which together are ~5% currently, will increase to 18%.

However, given strong government thrust to promote renewable energy, the GST Council
could exclude / provide a concessional rate renewable energy from the regime.

Impact of GST on real estate will depend upon the abatement allowed on agreement
value
From the point of view of consumers, the impact of GST on the real estate sector will hinge on its
effective implementation rate.
In the residential segment, completed properties do not attract service tax and so will have no impact
of the implementation of GST.
In case of under construction properties, consumers pay the following:

Stamp duty and registration charges (which are state specific and which will not fall under the
purview of GST)

Service taxes including Swacchh Bharat Cess and Krishi Kalyan Cess totally adding up to
15% (since service tax is applicable on 25% of the agreement value, effective outgo
translates to 3.75%. However in case of properties costing above Rs 1 crore or where the
carpet area of the residential unit exceeds 2,000 sq ft, service tax will be applicable on 30%
of the agreement value, translating to an effective outgo of 4.5%)

VAT - state-specific charge, for instance Maharashtra charges 1% VAT on agreement value,
while Karnataka charges 5.5%, Tamil Nadu and West Bengal do not charge VAT - VAT is
expected
to
be
subsumed
under
GST

Thus, if the current service tax+VAT outgo is higher than the effective GST rate, it will provide some
relief to the consumer. In case the current outgo is lower than the effective GST rate, it will further
burden the residential real estate sector which is already facing headwinds, especially with regards to
demand. A crucial clarification required at the moment, is the treatment of GST in lieu of service tax,
namely whether applicable at 25% or at a rate different from 25%. This will have a direct bearing on
its overall impact.
Leasing of residential properties does not attract service tax and so will have no impact of the
implementation of GST.

On the other hand, leasing of commercial properties attracts service tax and will be impacted by GST.
Again, the impact will depend on the effective rate of GST.
From the developer"s point of view, implementation of GST will results in lower construction costs.
Overall tax incidence on inputs like cement and steel is expected to decline, thereby leading to
improved margins for the developer. However, whether these benefits are passed on to the consumer
remains to be seen. Additionally, further clarity is required on the availability of input tax credit with
respect to works contract which results in construction of immovable property as it will determine its
impact on the sector.
From the point of view on consumers, the Impact of GST on the real estate sector will hinge on its
effective implementation rate.
In the residential segment, completed properties do not attract service tax and so will have no impact
of the implementation of GST.
In case of under construction properties, consumers pay the following:

Stamp duty and registration charges (which are state specific and which will not fall under the
purview of GST)

Service taxes including Swacchh Bharat Cess and Krishi Kalyan Cess totally adding up to
15% (since service tax is applicable on 25% of the agreement value, effective outgo
translates to 3.75%. However in case of properties costing above Rs 1 crore or where the
carpet area of the residential unit exceeds 2,000 sq ft, service tax will be applicable on 30%
of the agreement value, translating to an effective outgo of 4.5%)

VAT - state-specific, for instance Maharashtra charges 1% VAT on agreement value, while
Karnataka charges 5.5% VAT, Tamil Nadu and West Bengal do not charge VAT - VAT is
expected to be subsumed under GST

Thus, if the current service tax+VAT outgo is higher than the effective GST rate, it will provide some
relief to the consumer. In case the current outgo is lower than the effective GST rate, it will further
burden the residential real estate sector which is already facing headwinds, especially with regards to
demand.
Leasing of residential properties does not attract service tax and so will have no impact of the
implementation of GST.
On the other hand, leasing of commercial properties attracts service tax and will be impacted by
GST.Again,

the

impact

will

depend

on

Hotels - GST impact will be based on the location

the

effective

rate

of

GST.

Hotel rooms currently attract Service tax and Luxury tax. While Service tax is levied by the union
government and currently stands at 8.7% (taking into account the abatement rate of 40%, Swacch
Bharat Cess and Krishi Kalyan Cess), Luxury tax is a state subject. Luxury tax rate currently varies
between 5% - 12.5% depending on the state. Therefore, we believe that the impact of GST on hotels
will be negative or positive depending on the rate as well as the state in which the property is located.

Steel - Neutral
With GST implementation, we expect the overall tax incidence on the sector to potentially remain
same with a marginally positive impact in states imposing high VAT considering that the steel
producing states are not the key consuming centres; thereby attracting high VAT (state-specific).
Typically indirect taxes in the sector are close to 15-18% depending upon whether the sales are
within or outside the state. If the GST is levied at 18% the effective tax rate will remain at similar
levels and there will be no visible impact on the steel sector (slight positive bias).

Pharmaceuticals - Neutral
GST for pharma companies likely to remain similar to the current effective tax rate of ~12%. However,
as the pharma industry receives area based exemption on indirect taxes, any changes in the
exemption or re-negotiation of Memorandum of understanding (MoUs) between the government
(state, central) and the companies can have a slight negative impact on the sector. GST will enable
pharma

companies

to

rationalize

their

distribution

networks

through

consolidation

of

depots/warehouses and better inventory management.

Oil and Gas - Neutral

The Oil & Gas Industry would largely be marginally impacted by the introduction of GST; the reason
being that 5 petroleum products (ie crude, natural gas, ATF, diesel and petrol) are excluded from the
coverage of GST for the initial years while the remaining petroleum products (for eg kerosene,
naphtha, LPG, etc) are covered within the coverage of GST. As a result, the industry would be
required to comply with both the current tax regime as well as the GST regime. So, overall impact is
neutral.

Agri-commodities: Tea, Sugar, Cotton - neutral

Most of the agri-commodities have a concessional rate of tax less than 10%. Being essential
commodities, it is unlikely the GST rates will be different from the current concessional rates.

Coal and Power - Neutral

End-users of coal are expected to witness an increase in fuel costs with implementation of
GST.

Excise duty on coal is levied at 6%, whereas VAT is levied at 5%. Assuming a GST rate of
18%, delivered cost of coal is likely to increase by 5-6% per tonne of coal.

Consequently, the variable cost of power generation from domestic coal is likely to increase
by 6-8 paise per unit. On the other hand, the increase in variable cost from imported coal is
estimated to increase by 12 paise per unit.

The increase in fuel costs are not expected to have any impact on the profitability of power
generation companies. Central and Stage government projects are based on a "cost-plus"
principle, by which their tariffs are determined on the basis of actual cost of fuel. Moreover,
as per the National Tariff Policy 2016, even competitively bid projects (private sector) are also
allowed to pass-on any increase in costs on account of change in taxes and levies (subject to
approval of appropriate Commission). Consequently, we believe that the increase in fuel
costs will be passed on the distribution companies by these generators.

The impact of the increase in power purchase costs on retail tariffs will vary on a state-tostate basis, depending upon existing tariff structure and subsidy levels.

Macro-economic impact
Inflation could edge up 60 bps in short run
The Goods and Services Tax (GST), if implemented well, will improve ease of doing business and
boost investments and exports. We see its impact on GDP to be positive in the medium term, and
expect higher tax collections to improve the fiscal health. On inflation, the impact will be mixed. In the
short run, CPI inflation could rise by up to 60 basis points (bps) as a result of the implementation of
GST, while in the longer run reduction in the cascading effect of taxes, avoidance of double taxation,
and lower logistics costs will help lower inflation.

Reform big bang

The government took the first step towards making the long-awaited Goods and Services Tax (GST)
into law when the Constitutional Amendment Bill was passed in the Rajya Sabha late on Wednesday
sans dissent. When enacted, GST will subsume a slew of indirect taxes such as excise, sales and
service tax and create a common tax on both goods and services. This will help raise the ease of
doing business in India by simplifying the tax structure, improving tax compliance and reducing the
cascading effect of taxation.
A sharper analysis of impact on the economy and sectors will be attempted once there is clarity on
the GST rate.

A positive for growth

In the medium term, we expect GST to have a positive 1-2% impact on GDP. A unified market with
seamless movement of goods would reduce transaction and logistics costs, and boost exports by
making them more competitive. Further, by reducing the cascading effect of taxes, cost of production
will decline and improve profit margins for companies, which, in turn, will attract more investments.
The structure of GST encourages tax compliance as manufactures will get input tax credit for all
goods and services produced in the supply chain earlier. As a result, it incentivises manufacturers to
operate within the organised sector, draw in and reduce the unorganised sector of the economy.
These factors, we believe, will support GDP growth and investment sustainably.
In addition, fiscal situation is also likely to improve as higher tax compliance and a broader tax base
will result in higher tax collections. Currently, indirect taxes account for 34% of the total taxes
collected.

Inflation to rise in the short run

The impact on inflation depends on the GST rate adopted. In the short run, we see inflation edging
up, especially for services. Currently, the government levies a 14.5% tax on services. With the GST
rate likely to be closer to, or above 18%, services are expected to see higher inflation. On the other
hand, manufacturing goods inflation will be lower because, given that they already pay 24-25% state
and central taxes, the advent of GST lowers the incidence drastically.
The CPI-based inflation calculation assigns close to 30% weight to services. Assuming that the GST
rate is set at 18%, tax on services will increase and raise inflation by 60 basis points over the short
run.
And since the GST rate is supposed to be a revenue-neutral rate, there will be no significant upward
pressure on inflation and consumers in the medium-term. The reduction in the cascading effect of
taxation, lower cost of production, efficiency gains in supply chain and lower core inflation are likely to
benefit

and

trend

lower.

Fiscal impact

GST is expected to result in improvement in tax collections by spawning uniformity and simplicity.
The use of information technology systems to match supply and purchase invoices would reduce the
scope of tax evasion. Also, a more comprehensive definition of taxation under GST will take care of
the ambiguity arising on account of distinction between "goods" and "services" (Report on revenue
neutral rate and structure of rates for GST, December 2015).
This, combined with the expected improvement in growth - as GST improves productivity and
encourages investments - would mean that tax buoyancy improves. While it is difficult to quantify the
precise impact at this stage, tax revenues for the government should improve in the medium-to-long

term,

helping

it

attain

fiscal

targets.

The international learnings of GST implementation

When implemented in many countries, GST has caused a spike in inflation with the impact lasting 1012 months. The duration of the impact on retail sales varied, with consumer spending growth
normalising within 3 months in Japan, Australia and China, but taking as long as a year in Singapore.
Also, most countries witnessed a pre-GST spending rush. Malaysia, which implemented it in April
2015, saw a spending rush -- but not on big-ticket items. Sales of electronics & telecommunications
equipment, departmental and general stores, jewellery and watches, furniture, and apparel rose. This
was reflected in the rise in credit card transactions and rise in narrow money supply (M1), which
captures the transactions" demand for money. Consumer spending also surged in Australia, Japan,
China

and

Singapore

just

before

GST

kicked

in.

What is the GST tax rate across other regions?

Except for Scandinavian countries, where the tax is levied at a standard rate of 25%, few others have
been successful in sustaining high VAT/GST rates. For example, New Zealand introduced a tax rate
of 10% on a base consisting of all goods and services except financial services. And in Singapore, it
started as low as 3% and was raised gradually. Globally, the average rate is close to 16.4%, in AsiaPacific 9.88%. Canada and Nigeria have the lowest rate of 5%.

GST to have a positive impact on Auto sector

Published Date: 05-Aug-2016
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Auto ancillary industry's effective tax rate which is currently at

28-30% is expected to come down to 18% upon
implementation of GST. However, this benefit will be passed
on to OEMs, which will eventually drive expansion in auto
demand. It is also expected to improve the price
competitiveness of the organised players, especially in
products largely sold in the aftermarket segment (eg
batteries - where share from after-market is greater than
50%).

GST will lower effective taxes; organised sector to gain;

logistics costs to fall
After a decade-long struggle, the Goods and Services Tax
(GST), which has already been adopted by 160+ countries in
some form or the other, sailed over the first of three hurdles
when the Rajya Sabha unanimously adopted the Constitution
Amendment Bill to facilitate its legislation.
Coming up next is the GST Council, comprising the Finance
Minister and nominated State Finance Ministers, which is
expectd to be formed in 2 months to deliberate on the
specific features of the tax including the final rate structure,
exemptions, threshold limits and date of implementation on
petroleum products.
Further, the Constitution Amendment Bill also needs to be
passed by at least 15 state legislatures (50% of the states)
before becoming an Act. Then the Centre and the states will
have to pass their GST laws and turn India into a unified
market.

So which segments stand to gain and which won??t

with the implementation of GST?
CRISIL Research took a look at what this means:
Heralding transparency, reducing the cascading effect of
taxes
GST is expected to bring uniformity in taxation and reduce its
cascading effect leading to cheaper goods and services.
Currently, excise and value-added tax (VAT) cannot be offset,
so they cascade. In addition, VAT credits cannot be carried
across states. Both these characteristics would change
under the GST regime.
A dual-structure is on cards where the Centre would levy and
collect the Central Goods and Services Tax (CGST), and
states would levy and collect the State Goods and Services
Tax (SGST) on all transactions within a state. The states will
be able to fix their SGST rates above the floor rate, but within
a narrow band.
Input tax credit of CGST would be available for discharging
the CGST liability on the output at each stage. Ditto SGST.
No cross-utilisation of credit (across CGST and SGST) would
be permitted. The Centre would levy Integrated Goods and
Services Tax (IGST) on inter-state supply of goods and
services, which might be a combination of CGST and SGST.
As for IGST, inter-state sellers can avail of input tax credit.
The proposal for additional tax of up to 1% on the supply of
goods to be levied on inter-state trade for 2 years is on its
way out, which will reduce its cascading effect and maximise
the benefits from GST.

As per the Constitution Amendment Bill, all goods and

services (except alcohol for human consumption) will be
brought under the GST purview. While petroleum/petroleum
products have been included in the framework, GST would
be levied only upon the Council??s recommendations,
implying that present taxes (excise duty, sales tax, CST)
would continue to be levied on these products. For tobacco
and tobacco products, taxes imposed by the Centre would be
levied over and above the GST.
All major indirect taxes levied by the Centre and the States
will be subsumed in the CGST and the SGST

Source: CRISIL Research

Current exemptions on certain goods to continue
Multiple exemptions exist under the present tax system ?
? the Centre has ~300 items exempted from central excise
duty, while the States (together) have ~90 items exempted
from VAT. These will be merged into a Final synchronized
exemption list under the GST regime. While imposing the
GST on essential goods that are currently exempted from
either excise or VAT or both would be regressive in nature as
their prices would shoot up, the more the exemptions that are
retained the higher will be the standard rate. Hence, the

government must limit exemptions to essential goods in an

ideal GST regime.
The proposed GST rate structure and revenue neutral rate
The Chief Economic Adviser-led committee also proposes a
3-rate structure -- low, standard and high.
Estimates of RNR and GST rates

Source: CRISIL Research

Impact on India Inc:
We have assumed a 12-18-40 rate structure for assessing
the impact on various sectors in this note (option 4)
1. Prices of goods to decline, cost of services to increase,
exports to get a boost: The effective indirect tax incidence is
expected to decline post the implementation of GST due to
removal of the cascading effect arising from the nonavailability of input tax credits across the value chain and
between states and removal of tax-on-tax (eg. VAT levied on
excise inclusive price). The standard excise duty of 12.5%
and VAT of 12.5-15% along with cess, entry taxes and CST
take the effective tax rate up to 26-30% in the current system

which will drop to a standard rate of 17-18% under the GST.

However, the prices of goods that are currently exempt from
excise duty or sales tax or are subject to concessional rates
are set to increase as the list of exemption under the GST
will be lowered. Since GST is a tax on consumption
(destination-based), exports would be zero-rated, i.e. export
prices would not include any taxes. Currently, exports are
reimbursed for central indirect taxes (excise and customs
duties) but don??t get full offsets for CST and certain
state-level taxes such as entry taxes and octroi. Post GST,
this non-rebated indirect tax induced distortions would be
removed, enhancing competitiveness of Indian exporters. Tax
on Services will go up to 18% standard rate from 14%
currently.
Based on our analysis below, GST will be largely a
beneficiary for Automobiles, Cement, Media and
Entertainment sector. GST will have a negative impact on
service industries such as restaurants and quick service
restaurants (QSR). Impact of GST for hotels will be depend
on its location whereas for real estate it will depend on its
treatment with regards to agreement value.
2. Better operational efficiency due to improvement in supply
chains: Since the GST subsumes most of the state-level
taxes, it would reduce the need for reconciliation at state
borders. This could lead to a dismantling of the web of checkposts around the country, thereby speeding up the movement
of goods and reducing logistics and inventory management
costs, which are very high in India vis- -vis other countries.
CRISIL Research expects the rollout of goods and services
tax (GST) to bring down the logistics costs of companies
engaged in the production of non-bulk goods by as much as
20%. Savings will accrue as a result of gradual phasing out

of the central sales tax (CST), consolidation of warehouse

space, faster transit of goods since local taxes will be
subsumed into the GST and as state level check posts will be
dismantled.
Indian corporate spend an average of 6-8% of sales towards
logistics. GST is expected to a costs savings to the tune of
1.0-1.5% of sales over a 3-4 year period. Eliminating delays
at check posts will yield additional savings of 0.4-0.8% of
sales, which will take the overall logistics costs savings to
upto 1.5-2.0% of sales for companies. These cost savings
are, however, more likely to be gradual and back ended as
corporates will have to realign their supply chain while
ensuring minimum business disruption.
Sectors that have set up warehouses due to tax
considerations like consumer durables, pharmaceuticals,
FMCG, and cement will be key beneficiaries. However
sectors like automobiles, which have largely set up
warehouses purely for logistical considerations (due to the
large stockyard space required), the extent of consolidation
will be limited reducing benefits. Sectors dealing with
transportation of bulk commodities like iron ore and coal will
have limited impact.
3. Narrowing differentials between unorganised and
organised players: GST has an in-built incentive of selfpolicing. Since input tax credit will be available for all taxes
paid earlier in the value chain, firms would require evidence
of compliance from the preceding links to claim set-offs.
Thus, they would prefer sourcing inputs from compliant firms.
This could increasingly bring unorganised players under the
tax net, thereby reducing their price competitiveness vs.
organized players.

Sectoral impact:
Automobiles and Auto Ancillaries ?? Positive
Within passenger vehicle industry, mid-size segment
(1,200-1,500 cc) will be the largest beneficiary with an
estimated duty decline of nearly 20%. Small cars
segment could see a price benefit of about 10% and
luxury cars & UVs segment to get a limited ~5% benefit.
Given the intense competitive scenario & players?
? struggle to maintain the market share coupled with
strong financials of the companies, CRISIL Research
expects the players to pass on the tax benefit to end
consumers.
o In turn, we anticipate a consumer preference to
shift towards mid-size segment led by this shrinking
gap between small cars & mid-size segment.
o Moreover, increasing affordability, lower cost of
ownership and ample launches in the mid-size
segment will support the change in consumer
preference as well.
o On the top end vehicle front, we do not foresee a
significant impact on demand as price does not
particularly dictate the purchasing decision for the
segments.
Two wheeler industry will have a similar impact and
prices will drop by about 8-10%. This will translate into
better demand for price sensitive 100-125 cc segment.
150+ cc vehicles are not estimated have a significant
impact.
Tractors are currently levied a 0% central excise duty

and a 4% VAT. Under the new GST regime, central GST

will remain 0% and state GST is anticipated to be in the
same range as current VAT. So we do not expect much
change in the demand scenario for tractors.
Commercial vehicle, which get subjected to Central
Excise (12.5%) and VAT (12.5%), is expected to benefit
marginally depending on the RNR adopted.
o GST will lead to the hub and spoke model gaining
prominence, and a faster shift towards larger
MHCV trucks in primary routes - to 37 tonne from
31 tonne and from 25 tonne multi-axel vehicles
(MAVs) and 40 tonne trailers from 35 tonne.
o The spokes will now be catered largely by ICVs
aiding to overall MHCV sales over the long run
o However, better fleet productivity will result in lower
requirement for commercial vehicles
Auto ancillary industry??s effective tax rate which
is currently at 28-30% is expected to come down to 18%
upon implementation of GST. However, this benefit will
be passed on to OEMs, which will eventually drive
expansion in auto demand. It is also expected to
improve the price competitiveness of the organised
players, especially in products largely sold in the
aftermarket segment (eg batteries - where share from
after-market
is
greater
than
50%).
Cement - Positive
With GST implementation, we expect the overall tax
incidence on the sector to potentially decline. Typically,
indirect taxes in the sector are close to 28-30% which would

potentially come down post GST implementation to the

effective tax rate. Further, the sector will also benefit from
expected decline in logistics costs with consolidation of
warehouses especially for large players with a pan-India
presence.
Media & Entertainment - Positive
Media and Entertainment Multiplex- Positive
Multiplexes would be a key beneficiary of GST. At present,
multiplexes pay local state taxes like entertainment tax and
VAT on overall revenues including food and beverages. In
addition, they also pay service tax on projector equipment,
utility, security, housekeeping and other cost which are paid
to central government. The blended average rate for
multiplex players would be ~24-25% across the country
which would reduce to ~18%.
Media and Entertainment DTH - Positive
DTH players pay service tax of 14.5% and entertainment tax
of which varies from various states (in range of 2% to 35%).
Their indirect tax outgo is ~23-25% which would reduce to
~18%.
Media and Entertainment Broadcaster - Negative
Broadcasters pay indirect tax in range of 14-15% which
would increase to 18% post implementation of GST.
Retailing ?? Positive (especially organised retailers)
Rentals which is one of the major costs for retailers attracts
service tax of 14.5%. The retailers cannot set-off this costs
like the other industries as the companies trading goods

(retailers), which pay VAT, are not allowed to claim credit for
the service tax paid on different items since they have no
central tax against which this can be set off. This creates
additional operating expenses for the players. However,
passing of GST bill will now allow these indirect taxes
(service tax) on lease rental to be set off. This will help in
expansion of profitability margin. Further, the bill will also
help organised retailers as the single tax will bring majority of
transactions of unorganised players under the tax net and
thereby reduce the price gap in retail prices of various items.
E-commerce is neutral
Bill is expected to bring some clarity in online business. It will
also open new markets for online players who face
complexities of entry tax and other processes while entering
in specific states.
E-commerce players have large number of sellers listed on
their platform. These sellers will have cash-flow issues as
they will have to claim refunds for tax paid on inputs , which
e-tailers will not be able to account for. Thus, this will
increase the compliance burden for e-commerce players.
Further, any payment made to a supplier would be subject to
tax collected at source at the notified rate. This might create
a rift between sellers and e-commerce companies.
Restaurants and QSR - Negative
Restaurants and Quick Service Restaurants (QSR) currently
attract Service tax as well as Value Added Tax (VAT). While
Service tax is currently charged at 6% (taking into account
the abatement rate of 60%, Swacch Bharat Cess and Krishi
Kalyan Cess), VAT is charged at 12.5% for food items
(including non-aerated, non-alcoholic drinks) and at 25% for

aerated drinks. We believe that with the exclusion of aerated

drinks, the impact on the restaurants and QSRs will be
negative only if the GST rate is higher than 18%. However,
with aerated drinks likely to be clubbed under the 'Luxury
category' and attract GST at 40%, the impact on this
segment will be negative.
Textiles - Marginally negative
For the textile sector, a major proportion of sales is derived
from exports, which will continue to be zero-rated. Effective
tax rate for the textile sector is 6-7%. If it is not classified as
goods of basic necessity and the tax rate is increased, it will
have a negative impact on the players catering to the
domestic segment.
Telecom Services ?? Marginally Negative
The mobile bills for both prepaid and postpaid subscribers
may go up if the rate for GST is set above 15% (the service
tax (including KKC and SBC) currently paid for the mobile
bills). Also, the way in which telecom circles are classified is
not aligned with the geographical boundaries for some of the
states and UTs. For e.g., MP telecom circle also includes the
state of Chhattisgarh; Delhi circle includes neighboring cities
of Noida and Gurgaon which fall in the geographical
boundaries of UP and Haryana respectively. If different rates
are imposed by such states, the price of a prepaid pack will
vary across different regions in a same circle, leading to
pricing discrepancies and consumer complaints.
IT Services ?? Marginally Negative
IT companies at present have a relatively simplified tax
regime wherein, there is a single point of taxation which is
the central service tax. Under the new GST regime, there is

not much clarity on the slab applicable to the IT Companies

and compliance might come under Central GST (CGST),
State GST (SGST) and Integrated GST (IGST). This could
lead to multiple taxation points, which will lead to increased
costs for players as invoicing will now cost more. On the
hardware front, movement will become smooth. Currently,
duty on manufactured goods ranges from 14-15%. A rate
less than this would reduce costs for certain hardware
components.
Renewable Energy - Negative
Implementation of GST, assuming 18% rate, will
increase solar power project cost by 13-15
o Solar modules, which account for 55-60% of total
capital cost, and are largely imported, there exists
no customs duty. Also, VAT and other levies like
entry tax and excise duty, which together are ~5%
currently, will increase to 18%.
However, given strong government thrust to promote
renewable energy, the GST Council could exclude /
provide a concessional rate renewable energy from the
regime.
Impact of GST on real estate will depend upon the
abatement allowed on agreement value
From the point of view of consumers, the impact of GST on
the real estate sector will hinge on its effective
implementation rate.
In the residential segment, completed properties do not
attract service tax and so will have no impact of the

implementation of GST.
In case of under construction properties, consumers pay the
following:
Stamp duty and registration charges (which are state
specific and which will not fall under the purview of
GST)
Service taxes including Swacchh Bharat Cess and
Krishi Kalyan Cess totally adding up to 15% (since
service tax is applicable on 25% of the agreement
value, effective outgo translates to 3.75%. However in
case of properties costing above Rs 1 crore or where
the carpet area of the residential unit exceeds 2,000 sq
ft, service tax will be applicable on 30% of the
agreement value, translating to an effective outgo of
4.5%)
VAT ?? state-specific charge, for instance
Maharashtra charges 1% VAT on agreement value,
while Karnataka charges 5.5%, Tamil Nadu and West
Bengal do not charge VAT ?? VAT is expected to
be
subsumed
under
GST
Thus, if the current service tax+VAT outgo is higher than the
effective GST rate, it will provide some relief to the consumer.
In case the current outgo is lower than the effective GST
rate, it will further burden the residential real estate sector
which is already facing headwinds, especially with regards to
demand. A crucial clarification required at the moment, is the
treatment of GST in lieu of service tax, namely whether
applicable at 25% or at a rate different from 25%. This will
have a direct bearing on its overall impact.

Leasing of residential properties does not attract service tax

and so will have no impact of the implementation of GST.
On the other hand, leasing of commercial properties attracts
service tax and will be impacted by GST. Again, the impact
will depend on the effective rate of GST.
From the developer??s point of view, implementation of
GST will results in lower construction costs. Overall tax
incidence on inputs like cement and steel is expected to
decline, thereby leading to improved margins for the
developer. However, whether these benefits are passed on to
the consumer remains to be seen. Additionally, further clarity
is required on the availability of input tax credit with respect
to works contract which results in construction of immovable
property as it will determine its impact on the sector.
From the point of view on consumers, the Impact of GST on
the real estate sector will hinge on its effective
implementation rate.
In the residential segment, completed properties do not
attract service tax and so will have no impact of the
implementation of GST.
In case of under construction properties, consumers pay the
following:
Stamp duty and registration charges (which are state
specific and which will not fall under the purview of
GST)
Service taxes including Swacchh Bharat Cess and
Krishi Kalyan Cess totally adding up to 15% (since
service tax is applicable on 25% of the agreement
value, effective outgo translates to 3.75%. However in

case of properties costing above Rs 1 crore or where

the carpet area of the residential unit exceeds 2,000 sq
ft, service tax will be applicable on 30% of the
agreement value, translating to an effective outgo of
4.5%)
VAT ?? state-specific, for instance Maharashtra
charges 1% VAT on agreement value, while Karnataka
charges 5.5% VAT, Tamil Nadu and West Bengal do not
charge VAT ?? VAT is expected to be subsumed
under GST
Thus, if the current service tax+VAT outgo is higher than the
effective GST rate, it will provide some relief to the consumer.
In case the current outgo is lower than the effective GST
rate, it will further burden the residential real estate sector
which is already facing headwinds, especially with regards to
demand.
Leasing of residential properties does not attract service tax
and so will have no impact of the implementation of GST.
On the other hand, leasing of commercial properties attracts
service tax and will be impacted by GST.Again, the impact
will depend on the effective rate of GST.
Hotels ?? GST impact will be based on the location
Hotel rooms currently attract Service tax and Luxury tax.
While Service tax is levied by the union government and
currently stands at 8.7% (taking into account the abatement
rate of 40%, Swacch Bharat Cess and Krishi Kalyan Cess),
Luxury tax is a state subject. Luxury tax rate currently varies
between 5% - 12.5% depending on the state. Therefore, we
believe that the impact of GST on hotels will be negative or

positive depending on the rate as well as the state in which

the property is located.
Steel - Neutral
With GST implementation, we expect the overall tax
incidence on the sector to potentially remain same with a
marginally positive impact in states imposing high VAT
considering that the steel producing states are not the key
consuming centres; thereby attracting high VAT (statespecific).
Typically indirect taxes in the sector are close to 15-18%
depending upon whether the sales are within or outside the
state. If the GST is levied at 18% the effective tax rate will
remain at similar levels and there will be no visible impact on
the steel sector (slight positive bias).
Pharmaceuticals - Neutral
GST for pharma companies likely to remain similar to the
current effective tax rate of ~12%. However, as the pharma
industry receives area based exemption on indirect taxes,
any changes in the exemption or re-negotiation of
Memorandum of understanding (MoUs) between the
government (state, central) and the companies can have a
slight negative impact on the sector. GST will enable pharma
companies to rationalize their distribution networks through
consolidation of depots/warehouses and better inventory
management.
Oil and Gas - Neutral
The Oil & Gas Industry would largely be marginally impacted
by the introduction of GST; the reason being that 5 petroleum

products (ie crude, natural gas, ATF, diesel and petrol) are
excluded from the coverage of GST for the initial years while
the remaining petroleum products (for eg kerosene, naphtha,
LPG, etc) are covered within the coverage of GST. As a
result, the industry would be required to comply with both the
current tax regime as well as the GST regime. So, overall
impact is neutral.
Agri-commodities: Tea, Sugar, Cotton ?? neutral
Most of the agri-commodities have a concessional rate of tax
less than 10%. Being essential commodities, it is unlikely the
GST rates will be different from the current concessional
rates.
Coal and Power - Neutral
End-users of coal are expected to witness an increase
in fuel costs with implementation of GST.
Excise duty on coal is levied at 6%, whereas VAT is
levied at 5%. Assuming a GST rate of 18%, delivered
cost of coal is likely to increase by 5-6% per tonne of
coal.
Consequently, the variable cost of power generation
from domestic coal is likely to increase by 6-8 paise per
unit. On the other hand, the increase in variable cost
from imported coal is estimated to increase by 12 paise
per unit.
The increase in fuel costs are not expected to have any
impact on the profitability of power generation
companies. Central and Stage government projects are
based on a ??cost-plus?? principle, by
which their tariffs are determined on the basis of actual

cost of fuel. Moreover, as per the National Tariff Policy

2016, even competitively bid projects (private sector)
are also allowed to pass-on any increase in costs on
account of change in taxes and levies (subject to
approval of appropriate Commission). Consequently, we
believe that the increase in fuel costs will be passed on
the distribution companies by these generators.
The impact of the increase in power purchase costs on
retail tariffs will vary on a state-to-state basis, depending
upon existing tariff structure and subsidy levels.
Macro-economic impact
Inflation could edge up 60 bps in short run
The Goods and Services Tax (GST), if implemented well, will
improve ease of doing business and boost investments and
exports. We see its impact on GDP to be positive in the
medium term, and expect higher tax collections to improve
the fiscal health. On inflation, the impact will be mixed. In the
short run, CPI inflation could rise by up to 60 basis points
(bps) as a result of the implementation of GST, while in the
longer run reduction in the cascading effect of taxes,
avoidance of double taxation, and lower logistics costs will
help lower inflation.
Reform big bang
The government took the first step towards making the longawaited Goods and Services Tax (GST) into law when the
Constitutional Amendment Bill was passed in the Rajya
Sabha late on Wednesday sans dissent. When enacted, GST
will subsume a slew of indirect taxes such as excise, sales
and service tax and create a common tax on both goods and

services. This will help raise the ease of doing business in

India by simplifying the tax structure, improving tax
compliance and reducing the cascading effect of taxation.
A sharper analysis of impact on the economy and sectors will
be attempted once there is clarity on the GST rate.
A positive for growth
In the medium term, we expect GST to have a positive 1-2%
impact on GDP. A unified market with seamless movement of
goods would reduce transaction and logistics costs, and
boost exports by making them more competitive. Further, by
reducing the cascading effect of taxes, cost of production will
decline and improve profit margins for companies, which, in
turn, will attract more investments. The structure of GST
encourages tax compliance as manufactures will get input
tax credit for all goods and services produced in the supply
chain earlier. As a result, it incentivises manufacturers to
operate within the organised sector, draw in and reduce the
unorganised sector of the economy. These factors, we
believe, will support GDP growth and investment sustainably.
In addition, fiscal situation is also likely to improve as higher
tax compliance and a broader tax base will result in higher
tax collections. Currently, indirect taxes account for 34% of
the total taxes collected.
Inflation to rise in the short run
The impact on inflation depends on the GST rate adopted. In
the short run, we see inflation edging up, especially for
services. Currently, the government levies a 14.5% tax on
services. With the GST rate likely to be closer to, or above

18%, services are expected to see higher inflation. On the

other hand, manufacturing goods inflation will be lower
because, given that they already pay 24-25% state and
central taxes, the advent of GST lowers the incidence
drastically.
The CPI-based inflation calculation assigns close to 30%
weight to services. Assuming that the GST rate is set at 18%,
tax on services will increase and raise inflation by 60 basis
points over the short run.
And since the GST rate is supposed to be a revenue-neutral
rate, there will be no significant upward pressure on inflation
and consumers in the medium-term. The reduction in the
cascading effect of taxation, lower cost of production,
efficiency gains in supply chain and lower core inflation are
likely to benefit and trend lower.
Fiscal impact
GST is expected to result in improvement in tax collections
by spawning uniformity and simplicity. The use of information
technology systems to match supply and purchase invoices
would reduce the scope of tax evasion. Also, a more
comprehensive definition of taxation under GST will take care
of the ambiguity arising on account of distinction between
??goods?? and ??services?? (Report
on revenue neutral rate and structure of rates for GST,
December 2015).
This, combined with the expected improvement in growth
?? as GST improves productivity and encourages
investments ?? would mean that tax buoyancy
improves. While it is difficult to quantify the precise impact at

this stage, tax revenues for the government should improve

in the medium-to-long term, helping it attain fiscal targets.
The international learnings of GST implementation
When implemented in many countries, GST has caused a
spike in inflation with the impact lasting 10-12 months. The
duration of the impact on retail sales varied, with consumer
spending growth normalising within 3 months in Japan,
Australia and China, but taking as long as a year in
Singapore.
Also, most countries witnessed a pre-GST spending rush.
Malaysia, which implemented it in April 2015, saw a spending
rush -- but not on big-ticket items. Sales of electronics &
telecommunications equipment, departmental and general
stores, jewellery and watches, furniture, and apparel rose.
This was reflected in the rise in credit card transactions and
rise in narrow money supply (M1), which captures the
transactions?? demand for money. Consumer spending
also surged in Australia, Japan, China and Singapore just
before GST kicked in.
What is the GST tax rate across other regions?
Except for Scandinavian countries, where the tax is levied at
a standard rate of 25%, few others have been successful in
sustaining high VAT/GST rates. For example, New Zealand
introduced a tax rate of 10% on a base consisting of all
goods and services except financial services. And in
Singapore, it started as low as 3% and was raised gradually.
Globally, the average rate is close to 16.4%, in Asia-Pacific

9.88%. Canada and Nigeria have the lowest rate of 5%.

Impact of GST
Published Date: 05-Aug-2016
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Impact of GST

GST will lower effective taxes; organised sector to gain;

logistics costs to fall
After a decade-long struggle, the Goods and Services Tax
(GST), which has already been adopted by 160+ countries in
some form or the other, sailed over the first of three hurdles
when the Rajya Sabha unanimously adopted the Constitution
Amendment Bill to facilitate its legislation.
Coming up next is the GST Council, comprising the Finance
Minister and nominated State Finance Ministers, which is
expectd to be formed in 2 months to deliberate on the
specific features of the tax including the final rate structure,

exemptions, threshold limits and date of implementation on

petroleum products.
Further, the Constitution Amendment Bill also needs to be
passed by at least 15 state legislatures (50% of the states)
before becoming an Act. Then the Centre and the states will
have to pass their GST laws and turn India into a unified
market.
So which segments stand to gain and which won't with the
implementation of GST?
CRISIL Research took a look at what this means:
Heralding transparency, reducing the cascading effect of
taxes
GST is expected to bring uniformity in taxation and reduce its
cascading effect leading to cheaper goods and services.
Currently, excise and value-added tax (VAT) cannot be offset,
so they cascade. In addition, VAT credits cannot be carried
across states. Both these characteristics would change
under the GST regime.
A dual-structure is on cards where the Centre would levy and
collect the Central Goods and Services Tax (CGST), and
states would levy and collect the State Goods and Services
Tax (SGST) on all transactions within a state. The states will
be able to fix their SGST rates above the floor rate, but within
a narrow band.
Input tax credit of CGST would be available for discharging
the CGST liability on the output at each stage. Ditto SGST.
No cross-utilisation of credit (across CGST and SGST) would
be permitted. The Centre would levy Integrated Goods and

Services Tax (IGST) on inter-state supply of goods and

services, which might be a combination of CGST and SGST.
As for IGST, inter-state sellers can avail of input tax credit.
The proposal for additional tax of up to 1% on the supply of
goods to be levied on inter-state trade for 2 years is on its
way out, which will reduce its cascading effect and maximise
the benefits from GST.
As per the Constitution Amendment Bill, all goods and
services (except alcohol for human consumption) will be
brought under the GST purview. While petroleum/petroleum
products have been included in the framework, GST would
be levied only upon the Council's recommendations, implying
that present taxes (excise duty, sales tax, CST) would
continue to be levied on these products. For tobacco and
tobacco products, taxes imposed by the Centre would be
levied over and above the GST.
All major indirect taxes levied by the Centre and the States
will be subsumed in the CGST and the SGST

Source: CRISIL Research

Current exemptions on certain goods to continue
Multiple exemptions exist under the present tax system ' the

Centre has ~300 items exempted from central excise duty,

while the States (together) have ~90 items exempted from
VAT. These will be merged into a Final synchronized
exemption list under the GST regime. While imposing the
GST on essential goods that are currently exempted from
either excise or VAT or both would be regressive in nature as
their prices would shoot up, the more the exemptions that are
retained the higher will be the standard rate. Hence, the
government must limit exemptions to essential goods in an
ideal GST regime.
The proposed GST rate structure and revenue neutral rate
The Chief Economic Adviser-led committee also proposes a
3-rate structure -- low, standard and high.
Estimates of RNR and GST rates

Source: CRISIL Research

Impact on India Inc:
We have assumed a 12-18-40 rate structure for assessing
the impact on various sectors in this note (option 4)
1. Prices of goods to decline, cost of services to increase,

exports to get a boost: The effective indirect tax incidence is

expected to decline post the implementation of GST due to
removal of the cascading effect arising from the nonavailability of input tax credits across the value chain and
between states and removal of tax-on-tax (eg. VAT levied on
excise inclusive price). The standard excise duty of 12.5%
and VAT of 12.5-15% along with cess, entry taxes and CST
take the effective tax rate up to 26-30% in the current system
which will drop to a standard rate of 17-18% under the GST.
However, the prices of goods that are currently exempt from
excise duty or sales tax or are subject to concessional rates
are set to increase as the list of exemption under the GST
will be lowered. Since GST is a tax on consumption
(destination-based), exports would be zero-rated, i.e. export
prices would not include any taxes. Currently, exports are
reimbursed for central indirect taxes (excise and customs
duties) but don't get full offsets for CST and certain statelevel taxes such as entry taxes and octroi. Post GST, this
non-rebated indirect tax induced distortions would be
removed, enhancing competitiveness of Indian exporters. Tax
on Services will go up to 18% standard rate from 14%
currently.
Based on our analysis below, GST will be largely a
beneficiary for Automobiles, Cement, Media and
Entertainment sector. GST will have a negative impact on
service industries such as restaurants and quick service
restaurants (QSR). Impact of GST for hotels will be depend
on its location whereas for real estate it will depend on its
treatment with regards to agreement value.
2. Better operational efficiency due to improvement in supply
chains: Since the GST subsumes most of the state-level
taxes, it would reduce the need for reconciliation at state
borders. This could lead to a dismantling of the web of check-

posts around the country, thereby speeding up the movement

of goods and reducing logistics and inventory management
costs, which are very high in India vis- -vis other countries.
CRISIL Research expects the rollout of goods and services
tax (GST) to bring down the logistics costs of companies
engaged in the production of non-bulk goods by as much as
20%. Savings will accrue as a result of gradual phasing out
of the central sales tax (CST), consolidation of warehouse
space, faster transit of goods since local taxes will be
subsumed into the GST and as state level check posts will be
dismantled.
Indian corporate spend an average of 6-8% of sales towards
logistics. GST is expected to a costs savings to the tune of
1.0-1.5% of sales over a 3-4 year period. Eliminating delays
at check posts will yield additional savings of 0.4-0.8% of
sales, which will take the overall logistics costs savings to
upto 1.5-2.0% of sales for companies. These cost savings
are, however, more likely to be gradual and back ended as
corporates will have to realign their supply chain while
ensuring minimum business disruption.
Sectors that have set up warehouses due to tax
considerations like consumer durables, pharmaceuticals,
FMCG, and cement will be key beneficiaries. However
sectors like automobiles, which have largely set up
warehouses purely for logistical considerations (due to the
large stockyard space required), the extent of consolidation
will be limited reducing benefits. Sectors dealing with
transportation of bulk commodities like iron ore and coal will
have limited impact.
3. Narrowing differentials between unorganised and
organised players: GST has an in-built incentive of selfpolicing. Since input tax credit will be available for all taxes

paid earlier in the value chain, firms would require evidence

of compliance from the preceding links to claim set-offs.
Thus, they would prefer sourcing inputs from compliant firms.
This could increasingly bring unorganised players under the
tax net, thereby reducing their price competitiveness vs.
organized players.
Sectoral impact:
Automobiles and Auto Ancillaries ' Positive
Within passenger vehicle industry, mid-size segment
(1,200-1,500 cc) will be the largest beneficiary with an
estimated duty decline of nearly 20%. Small cars
segment could see a price benefit of about 10% and
luxury cars & UVs segment to get a limited ~5% benefit.
Given the intense competitive scenario & players'
struggle to maintain the market share coupled with
strong financials of the companies, CRISIL Research
expects the players to pass on the tax benefit to end
consumers.
o In turn, we anticipate a consumer preference to
shift towards mid-size segment led by this shrinking
gap between small cars & mid-size segment.
o Moreover, increasing affordability, lower cost of
ownership and ample launches in the mid-size
segment will support the change in consumer
preference as well.
o On the top end vehicle front, we do not foresee a
significant impact on demand as price does not
particularly dictate the purchasing decision for the

segments.
Two wheeler industry will have a similar impact and
prices will drop by about 8-10%. This will translate into
better demand for price sensitive 100-125 cc segment.
150+ cc vehicles are not estimated have a significant
impact.
Tractors are currently levied a 0% central excise duty
and a 4% VAT. Under the new GST regime, central GST
will remain 0% and state GST is anticipated to be in the
same range as current VAT. So we do not expect much
change in the demand scenario for tractors.
Commercial vehicle, which get subjected to Central
Excise (12.5%) and VAT (12.5%), is expected to benefit
marginally depending on the RNR adopted.
o GST will lead to the hub and spoke model gaining
prominence, and a faster shift towards larger
MHCV trucks in primary routes - to 37 tonne from
31 tonne and from 25 tonne multi-axel vehicles
(MAVs) and 40 tonne trailers from 35 tonne.
o The spokes will now be catered largely by ICVs
aiding to overall MHCV sales over the long run
o However, better fleet productivity will result in lower
requirement for commercial vehicles
Auto ancillary industry's effective tax rate which is
currently at 28-30% is expected to come down to 18%
upon implementation of GST. However, this benefit will
be passed on to OEMs, which will eventually drive
expansion in auto demand. It is also expected to
improve the price competitiveness of the organised

players, especially in products largely sold in the

aftermarket segment (eg batteries - where share from
after-market
is
greater
than
50%).
Cement - Positive
With GST implementation, we expect the overall tax
incidence on the sector to potentially decline. Typically,
indirect taxes in the sector are close to 28-30% which would
potentially come down post GST implementation to the
effective tax rate. Further, the sector will also benefit from
expected decline in logistics costs with consolidation of
warehouses especially for large players with a pan-India
presence.
Media & Entertainment - Positive
Media and Entertainment Multiplex- Positive
Multiplexes would be a key beneficiary of GST. At present,
multiplexes pay local state taxes like entertainment tax and
VAT on overall revenues including food and beverages. In
addition, they also pay service tax on projector equipment,
utility, security, housekeeping and other cost which are paid
to central government. The blended average rate for
multiplex players would be ~24-25% across the country
which would reduce to ~18%.
Media and Entertainment DTH - Positive
DTH players pay service tax of 14.5% and entertainment tax
of which varies from various states (in range of 2% to 35%).
Their indirect tax outgo is ~23-25% which would reduce to
~18%.

 Media and Entertainment Broadcaster - Negative

Broadcasters pay indirect tax in range of 14-15% which
would increase to 18% post implementation of GST.
Retailing ' Positive (especially organised retailers)
Rentals which is one of the major costs for retailers attracts
service tax of 14.5%. The retailers cannot set-off this costs
like the other industries as the companies trading goods
(retailers), which pay VAT, are not allowed to claim credit for
the service tax paid on different items since they have no
central tax against which this can be set off. This creates
additional operating expenses for the players. However,
passing of GST bill will now allow these indirect taxes
(service tax) on lease rental to be set off. This will help in
expansion of profitability margin. Further, the bill will also
help organised retailers as the single tax will bring majority of
transactions of unorganised players under the tax net and
thereby reduce the price gap in retail prices of various items.
E-commerce is neutral
Bill is expected to bring some clarity in online business. It will
also open new markets for online players who face
complexities of entry tax and other processes while entering
in specific states.
E-commerce players have large number of sellers listed on
their platform. These sellers will have cash-flow issues as
they will have to claim refunds for tax paid on inputs , which
e-tailers will not be able to account for. Thus, this will
increase the compliance burden for e-commerce players.
Further, any payment made to a supplier would be subject to
tax collected at source at the notified rate. This might create
a rift between sellers and e-commerce companies.

Restaurants and QSR - Negative

Restaurants and Quick Service Restaurants (QSR) currently
attract Service tax as well as Value Added Tax (VAT). While
Service tax is currently charged at 6% (taking into account
the abatement rate of 60%, Swacch Bharat Cess and Krishi
Kalyan Cess), VAT is charged at 12.5% for food items
(including non-aerated, non-alcoholic drinks) and at 25% for
aerated drinks. We believe that with the exclusion of aerated
drinks, the impact on the restaurants and QSRs will be
negative only if the GST rate is higher than 18%. However,
with aerated drinks likely to be clubbed under the 'Luxury
category' and attract GST at 40%, the impact on this
segment will be negative.
Textiles - Marginally negative
For the textile sector, a major proportion of sales is derived
from exports, which will continue to be zero-rated. Effective
tax rate for the textile sector is 6-7%. If it is not classified as
goods of basic necessity and the tax rate is increased, it will
have a negative impact on the players catering to the
domestic segment.
Telecom Services ' Marginally Negative
The mobile bills for both prepaid and postpaid subscribers
may go up if the rate for GST is set above 15% (the service
tax (including KKC and SBC) currently paid for the mobile
bills). Also, the way in which telecom circles are classified is
not aligned with the geographical boundaries for some of the
states and UTs. For e.g., MP telecom circle also includes the
state of Chhattisgarh; Delhi circle includes neighboring cities
of Noida and Gurgaon which fall in the geographical

boundaries of UP and Haryana respectively. If different rates

are imposed by such states, the price of a prepaid pack will
vary across different regions in a same circle, leading to
pricing discrepancies and consumer complaints.
IT Services ' Marginally Negative
IT companies at present have a relatively simplified tax
regime wherein, there is a single point of taxation which is
the central service tax. Under the new GST regime, there is
not much clarity on the slab applicable to the IT Companies
and compliance might come under Central GST (CGST),
State GST (SGST) and Integrated GST (IGST). This could
lead to multiple taxation points, which will lead to increased
costs for players as invoicing will now cost more. On the
hardware front, movement will become smooth. Currently,
duty on manufactured goods ranges from 14-15%. A rate
less than this would reduce costs for certain hardware
components.
Renewable Energy - Negative
Implementation of GST, assuming 18% rate, will
increase solar power project cost by 13-15
o Solar modules, which account for 55-60% of total
capital cost, and are largely imported, there exists
no customs duty. Also, VAT and other levies like
entry tax and excise duty, which together are ~5%
currently, will increase to 18%.
However, given strong government thrust to promote
renewable energy, the GST Council could exclude /
provide a concessional rate renewable energy from the
regime.

Impact of GST on real estate will depend upon the

abatement allowed on agreement value
From the point of view of consumers, the impact of GST on
the real estate sector will hinge on its effective
implementation rate.
In the residential segment, completed properties do not
attract service tax and so will have no impact of the
implementation of GST.
In case of under construction properties, consumers pay the
following:
Stamp duty and registration charges (which are state
specific and which will not fall under the purview of
GST)
Service taxes including Swacchh Bharat Cess and
Krishi Kalyan Cess totally adding up to 15% (since
service tax is applicable on 25% of the agreement
value, effective outgo translates to 3.75%. However in
case of properties costing above Rs 1 crore or where
the carpet area of the residential unit exceeds 2,000 sq
ft, service tax will be applicable on 30% of the
agreement value, translating to an effective outgo of
4.5%)
VAT ' state-specific charge, for instance Maharashtra
charges 1% VAT on agreement value, while Karnataka
charges 5.5%, Tamil Nadu and West Bengal do not
charge VAT ' VAT is expected to be subsumed under
GST

Thus, if the current service tax+VAT outgo is higher than the

effective GST rate, it will provide some relief to the consumer.
In case the current outgo is lower than the effective GST
rate, it will further burden the residential real estate sector
which is already facing headwinds, especially with regards to
demand. A crucial clarification required at the moment, is the
treatment of GST in lieu of service tax, namely whether
applicable at 25% or at a rate different from 25%. This will
have a direct bearing on its overall impact.
Leasing of residential properties does not attract service tax
and so will have no impact of the implementation of GST.
On the other hand, leasing of commercial properties attracts
service tax and will be impacted by GST. Again, the impact
will depend on the effective rate of GST.
From the developer's point of view, implementation of GST
will results in lower construction costs. Overall tax incidence
on inputs like cement and steel is expected to decline,
thereby leading to improved margins for the developer.
However, whether these benefits are passed on to the
consumer remains to be seen. Additionally, further clarity is
required on the availability of input tax credit with respect to
works contract which results in construction of immovable
property as it will determine its impact on the sector.
From the point of view on consumers, the Impact of GST on
the real estate sector will hinge on its effective
implementation rate.
In the residential segment, completed properties do not
attract service tax and so will have no impact of the
implementation of GST.
In case of under construction properties, consumers pay the

following:
Stamp duty and registration charges (which are state
specific and which will not fall under the purview of
GST)
Service taxes including Swacchh Bharat Cess and
Krishi Kalyan Cess totally adding up to 15% (since
service tax is applicable on 25% of the agreement
value, effective outgo translates to 3.75%. However in
case of properties costing above Rs 1 crore or where
the carpet area of the residential unit exceeds 2,000 sq
ft, service tax will be applicable on 30% of the
agreement value, translating to an effective outgo of
4.5%)
VAT ' state-specific, for instance Maharashtra charges
1% VAT on agreement value, while Karnataka charges
5.5% VAT, Tamil Nadu and West Bengal do not charge
VAT ' VAT is expected to be subsumed under GST
Thus, if the current service tax+VAT outgo is higher than the
effective GST rate, it will provide some relief to the consumer.
In case the current outgo is lower than the effective GST
rate, it will further burden the residential real estate sector
which is already facing headwinds, especially with regards to
demand.
Leasing of residential properties does not attract service tax
and so will have no impact of the implementation of GST.
On the other hand, leasing of commercial properties attracts
service tax and will be impacted by GST.Again, the impact
will depend on the effective rate of GST.

Hotels ' GST impact will be based on the location

Hotel rooms currently attract Service tax and Luxury tax.
While Service tax is levied by the union government and
currently stands at 8.7% (taking into account the abatement
rate of 40%, Swacch Bharat Cess and Krishi Kalyan Cess),
Luxury tax is a state subject. Luxury tax rate currently varies
between 5% - 12.5% depending on the state. Therefore, we
believe that the impact of GST on hotels will be negative or
positive depending on the rate as well as the state in which
the property is located.
Steel - Neutral
With GST implementation, we expect the overall tax
incidence on the sector to potentially remain same with a
marginally positive impact in states imposing high VAT
considering that the steel producing states are not the key
consuming centres; thereby attracting high VAT (statespecific).
Typically indirect taxes in the sector are close to 15-18%
depending upon whether the sales are within or outside the
state. If the GST is levied at 18% the effective tax rate will
remain at similar levels and there will be no visible impact on
the steel sector (slight positive bias).
Pharmaceuticals - Neutral
GST for pharma companies likely to remain similar to the
current effective tax rate of ~12%. However, as the pharma
industry receives area based exemption on indirect taxes,
any changes in the exemption or re-negotiation of
Memorandum of understanding (MoUs) between the
government (state, central) and the companies can have a

slight negative impact on the sector. GST will enable pharma

companies to rationalize their distribution networks through
consolidation of depots/warehouses and better inventory
management.
Oil and Gas - Neutral
The Oil & Gas Industry would largely be marginally impacted
by the introduction of GST; the reason being that 5 petroleum
products (ie crude, natural gas, ATF, diesel and petrol) are
excluded from the coverage of GST for the initial years while
the remaining petroleum products (for eg kerosene, naphtha,
LPG, etc) are covered within the coverage of GST. As a
result, the industry would be required to comply with both the
current tax regime as well as the GST regime. So, overall
impact is neutral.
Agri-commodities: Tea, Sugar, Cotton ' neutral
Most of the agri-commodities have a concessional rate of tax
less than 10%. Being essential commodities, it is unlikely the
GST rates will be different from the current concessional
rates.
Coal and Power - Neutral
End-users of coal are expected to witness an increase
in fuel costs with implementation of GST.
Excise duty on coal is levied at 6%, whereas VAT is
levied at 5%. Assuming a GST rate of 18%, delivered
cost of coal is likely to increase by 5-6% per tonne of
coal.
Consequently, the variable cost of power generation
from domestic coal is likely to increase by 6-8 paise per
unit. On the other hand, the increase in variable cost

from imported coal is estimated to increase by 12 paise

per unit.
The increase in fuel costs are not expected to have any
impact on the profitability of power generation
companies. Central and Stage government projects are
based on a 'cost-plus' principle, by which their tariffs are
determined on the basis of actual cost of fuel. Moreover,
as per the National Tariff Policy 2016, even
competitively bid projects (private sector) are also
allowed to pass-on any increase in costs on account of
change in taxes and levies (subject to approval of
appropriate Commission). Consequently, we believe
that the increase in fuel costs will be passed on the
distribution companies by these generators.
The impact of the increase in power purchase costs on
retail tariffs will vary on a state-to-state basis, depending
upon existing tariff structure and subsidy levels.
Macro-economic impact
Inflation could edge up 60 bps in short run
The Goods and Services Tax (GST), if implemented well, will
improve ease of doing business and boost investments and
exports. We see its impact on GDP to be positive in the
medium term, and expect higher tax collections to improve
the fiscal health. On inflation, the impact will be mixed. In the
short run, CPI inflation could rise by up to 60 basis points
(bps) as a result of the implementation of GST, while in the
longer run reduction in the cascading effect of taxes,
avoidance of double taxation, and lower logistics costs will
help lower inflation.
Reform big bang

The government took the first step towards making the longawaited Goods and Services Tax (GST) into law when the
Constitutional Amendment Bill was passed in the Rajya
Sabha late on Wednesday sans dissent. When enacted, GST
will subsume a slew of indirect taxes such as excise, sales
and service tax and create a common tax on both goods and
services. This will help raise the ease of doing business in
India by simplifying the tax structure, improving tax
compliance and reducing the cascading effect of taxation.
A sharper analysis of impact on the economy and sectors will
be attempted once there is clarity on the GST rate.
A positive for growth
In the medium term, we expect GST to have a positive 1-2%
impact on GDP. A unified market with seamless movement of
goods would reduce transaction and logistics costs, and
boost exports by making them more competitive. Further, by
reducing the cascading effect of taxes, cost of production will
decline and improve profit margins for companies, which, in
turn, will attract more investments. The structure of GST
encourages tax compliance as manufactures will get input
tax credit for all goods and services produced in the supply
chain earlier. As a result, it incentivises manufacturers to
operate within the organised sector, draw in and reduce the
unorganised sector of the economy. These factors, we
believe, will support GDP growth and investment sustainably.
In addition, fiscal situation is also likely to improve as higher
tax compliance and a broader tax base will result in higher
tax collections. Currently, indirect taxes account for 34% of
the total taxes collected.

Inflation to rise in the short run

The impact on inflation depends on the GST rate adopted. In
the short run, we see inflation edging up, especially for
services. Currently, the government levies a 14.5% tax on
services. With the GST rate likely to be closer to, or above
18%, services are expected to see higher inflation. On the
other hand, manufacturing goods inflation will be lower
because, given that they already pay 24-25% state and
central taxes, the advent of GST lowers the incidence
drastically.
The CPI-based inflation calculation assigns close to 30%
weight to services. Assuming that the GST rate is set at 18%,
tax on services will increase and raise inflation by 60 basis
points over the short run.
And since the GST rate is supposed to be a revenue-neutral
rate, there will be no significant upward pressure on inflation
and consumers in the medium-term. The reduction in the
cascading effect of taxation, lower cost of production,
efficiency gains in supply chain and lower core inflation are
likely to benefit and trend lower.
Fiscal impact
GST is expected to result in improvement in tax collections
by spawning uniformity and simplicity. The use of information
technology systems to match supply and purchase invoices
would reduce the scope of tax evasion. Also, a more
comprehensive definition of taxation under GST will take care
of the ambiguity arising on account of distinction between
'goods' and 'services' (Report on revenue neutral rate and

structure of rates for GST, December 2015).

This, combined with the expected improvement in growth ' as
GST improves productivity and encourages investments '
would mean that tax buoyancy improves. While it is difficult to
quantify the precise impact at this stage, tax revenues for the
government should improve in the medium-to-long term,
helping it attain fiscal targets.
The international learnings of GST implementation
When implemented in many countries, GST has caused a
spike in inflation with the impact lasting 10-12 months. The
duration of the impact on retail sales varied, with consumer
spending growth normalising within 3 months in Japan,
Australia and China, but taking as long as a year in
Singapore.
Also, most countries witnessed a pre-GST spending rush.
Malaysia, which implemented it in April 2015, saw a spending
rush -- but not on big-ticket items. Sales of electronics &
telecommunications equipment, departmental and general
stores, jewellery and watches, furniture, and apparel rose.
This was reflected in the rise in credit card transactions and
rise in narrow money supply (M1), which captures the
transactions' demand for money. Consumer spending also
surged in Australia, Japan, China and Singapore just before
GST kicked in.
What is the GST tax rate across other regions?
Except for Scandinavian countries, where the tax is levied at

a standard rate of 25%, few others have been successful in

sustaining high VAT/GST rates. For example, New Zealand
introduced a tax rate of 10% on a base consisting of all
goods and services except financial services. And in
Singapore, it started as low as 3% and was raised gradually.
Globally, the average rate is close to 16.4%, in Asia-Pacific
9.88%. Canada and Nigeria have the lowest rate of 5%.