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GST positive for auto, cement, real estate, negative for oil & gas, traditional retail: Fitch

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The Goods and Services Tax is likely to have a beneficial impact on India’s auto, cement and organised retail sectors, but a negative impact on the oil & gas, traditional retail and SME sectors, according to a report by Fitch Ratings.

The agency added that the impact on the property, electricity, telecoms, pharmaceutical and fertiliser sectors would be broadly neutral.

“Proposed tax rates under the GST for mid-size and luxury cars/SUVs would be nearly 8-12% lower, boosting the prospects for increasing the segment’s share within the overall mix,” the report said. “Tax rates remain largely neutral for the small size segment (28% under GST versus 29% earlier), while auto producers will derive cost benefits from a more streamlined supply chain as well as input tax credits.”

The report added that manufacturers would benefit from the fact that nearly 80% of cars are sold outside the manufacturing State.

Cement producers stand to gain under GST due to a lower effective tax rate, particularly for bagged cement, and the fact that coal, which is their main fuel source, will also attract a lower tax rate.

“The GST framework is likely to be a gift for the larger, more organised retail operators, which will be able to move to a nation-wide demand-based “hub-and-spoke” model rather than operating state by state,” the report said. “This also includes online retailers such as Amazon which will now be able to implement their typical operating model in the new common market.”

The report however added that the exclusion of key petroleum products from GST means that energy companies will have to continue paying varying VAT rates in different states, without the benefit of being able to avail of input credits from the additional GST they will now have to pay for goods purchased or services received.

“The new regime is intended to capture a much wider base, with the minimum threshold for paying GST lowered to annual sales of ₹2 million, from ₹15 million,” the report said. “Moreover, every seller along the supply chain, from the manufacturer to the small retailer, will be required to keep digital records and file their taxes online, presenting a serious challenge to many enterprises which still maintain manual book-keeping records.”

Fitch said that the GST effect on the real estate sector would be largely neutral since, although the effective tax rate for developers will be higher, they will also be able to avail of input tax credits on cement and steel, two major inputs.