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

Consumer goods and life-saving drugs to get cheaper

The country moved a step ahead in adopting its biggest tax reform since Independence, namely, the Goods & Services Tax (GST), with the GST Council fixing the rates for 1,211 items on Thursday.

Consumer goods and life-saving drugs are likely to be cheaper. Automobiles might get costlier, with cars likely to come in the 28 per cent bracket, plus cess.

Of the 1,211 items, seven per cent are on the exempt list, 14 per cent will be taxed at five per cent, 17 per cent will be taxed at 12 per cent, 19 per cent will be taxed at 28 per cent and the others at 18 per cent.

Hair oil, toothpaste and soap makers' products will be taxed at 18 per cent, lower than the present effective rate of 23-24 per cent. "Along expected lines and welcome. It will have a positive impact on our business. We still await clarity on categories like health supplements, shampoos and packaged juices," said Sunil Duggal, chief executive officer, Dabur India.

He said he expected packaged juices to remain in the 12 per cent bracket. Packaged foods, a growing business for many, remains unclear. While traditional sweets, sugar, edible oil, tea and coffee will be taxed at five per cent, instant coffee has been kept out of this bracket, revenue secratery Husmukh Adhia said on Thursday.

However, a lower tax bracket might not prove beneficial for all manufacturers. Companies enjoying excise duty sops might finally be paying higher taxes under the new regime, said at least two industry executives said on condition of anonymity. Companies from Hindustan Unilever (HUL) to Patanjali, Dabur, Marico, Jyothy Labs, Emami and Bajaj Corp, among others, recently set up factories in Assam to avail of tax benefits. Earlier, Himachal Pradesh and Uttarakhand offered similar benefits to attract investment. Under the GST regime, goods produced in such areas will no longer enjoy substantially lower tax rates, experts said. Companies, they said, might need to adjust their production capacities and realign geographical distribution of their manufacturing.

Still, consumer goods analysts were optimistic. "We expect GST rates to be beneficial to companies like HUL, as their indirect taxation currently is 26 per cent," said Abneesh Roy, senior vice-president at Edelweiss, the financial services group.

"We understand that the GST rate structure is extremely positive, encouraging and augurs well for the industry. It is anti-inflationary in nature and will help drive consumption as well as long-term economic growth", said Saugata Gupta, managing director and chief executive officer, Marico.

"HUL, Colgate and Godrej Consumer will benefit due to lower incidence of tax," said Sachin Bobade, consumer analyst at brokerage Dolat Capital. "These companies are likely to pass on the net benefits from lower rates to consumers but the efficiencies would be retained or even reinvested in the business."

According to industry sources, the GST rate for life-saving drugs would be five per cent. Currently, these enjoy tax exemption either at central or state level. Formulations attract an average nine per cent tax rate, while Active Pharma Ingredients (raw materials) are taxed at 12 per cent. 

"The proposed five per cent rate for life-saving drugs would be neutral. The pharma industry has been anticipating a 12 per cent rate. Ideally, all pharma products should be placed at five per cent," said Kirti Oswal, partner, BSR & Associates.

"A rate lower than 12 per cent will be a pleasant surprise; it will benefit the poor. We hope the industry would not be left with an inverted duty structure," said D G Shah, secretary general of the Indian Pharmaceutical Alliance. 

"National Pharmaceutical Pricing Authority should announce revised ceiling prices for drugs under price control immediately, to enable the companies to plan better," said Deeepnath Roy Chowdhury, president, Indian Drug Manufacturers Association.

In the case of automobiles, sources said the government was yet to clarify on tax levels. "The 28 per cent rate has not been officially announced. It could even be around 18 per cent," said Jinesh Gandhi, automobile analyst at brokerage Motilal Oswal. "Though, if we consider 28 per cent as the rate for small cars, there will be no material difference in consumer cost for metro cities like Mumbai and Delhi where octroi and other taxes like entry tax are levied. In other cities, cars might become cheaper by two to three per cent."

Cereals have been kept under the "exempt" category, as is jaggery, a byproduct of sugarcane, implying that prices of these essential commodities could fall. Consumer durables such as air conditioners and refrigerators will be in the 28 per cent bracket, lower than the 30-31 per cent at present. 'Sin' products such as tobacco (cigarettes), paan masala and luxury cars will attract 28 per cent tax plus a cess of 290 per cent, 135 per cent and 15 per cent, respectively.