Pass on GST benefit

After showing signs of nervousness, the stock market seems to have taken the transition to the Goods and Services Tax (GST) in its stride. One reason for the lack of reaction to this watershed event, which is bound to cause near-term disruption to businesses, could be that the market has had an extended time to analyse and factor in the GST impact on India Inc’s finances. However, this may not be the only reason for the stock market’s sanguine view. The GST can actually deliver a mini-stimulus to listed firms on several counts.

Whether they’re in the B2B or B2C businesses, GST incentivises buyers to rely on large, tax-compliant firms rather than small unorganised players for their sourcing requirements. The reverse charge mechanism, where buyers need to cough up taxes on behalf of unregistered suppliers, and the symbiotic input tax credit system both encourage such a shift. Listed manufacturers of intermediate goods — engineering, textiles, auto components and chemicals, for instance — may gain from this trend. The low threshold for the applicability of GST, at ₹20 lakh annual turnover, also does away with the tax arbitrage between smaller and larger firms across sectors. Post-GST, unbranded players in consumer businesses will no longer be in a position to offer severe price competition to larger branded rivals by leveraging on a negligible tax outgo. This may translate into market share gains for listed players in processed foods, readymade garments, retail, footwear and consumer appliances et al. The filing of returns and record keeping under GST rely overwhelmingly on the online mode; larger firms would obviously be more IT-ready than smaller ones. All these factors suggest that the advent of GST could trigger a large-scale reshuffle of market shares in favour of listed and branded players — a trend that was already under way post-demonetisation. Let’s not forget that GST also pegs down tax rates on a range of manufactured products, while increasing tax incidence for services. Given that the Indian listed universe carries a far greater weight to manufacturing than services, this means significant cost savings for India Inc.

Given that listed firms have been struggling to deliver to the profit expectations of the Street for several quarters now, the temptation may be strong for them to quietly soak up GST cost savings and pad up their profits. Indeed, in the past, India Inc has been quite accustomed to promptly passing on cost escalations to consumers through price hikes, while defraying cost savings on advertising, administrative overheads or employee benefits. But such a strategy can well backfire in the current economic context, where consumer demand is constrained by slow growth, uncertain job prospects and deflationary price trends. Therefore, irrespective of whether an anti-profiteering authority is watching or not, it would be wise for India Inc to sacrifice any short-term profit boost from GST, in favour of lower selling prices that deliver durable gains in the topline.

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