India’s consumption story is going to become even stronger given the goods and services tax slabs in the range of 5-28 per cent announced by the government. While the exact rate for different sectors is yet to be detailed out, most consumer items like paints , plywood, tiles, many fast moving consumers goods and select consumer durables are expected to be taxed at lower rates ( 12-28 per cent) than their current tax structure in excess of 25-30 per cent.
The GST rate of 28 per cent is likely to be neutral for most important categories in the automobile sectors like small passenger cars, commercial vehicles, buses, two and three wheelers as their effective tax rate is already around 27 per cent according to Antique Stock Broking.
The GST rates are negative for sectors like telecom, jewellery, textiles, print media, beverages, high end automobiles (sports utility vehicles, luxury cars), higher priced consumer durables (particularly air conditioners), cement, liquor and cigarettes . Stock of ITC still closed with gains of 3.6 per cent today as the current incidence of tax on cigarettes at more than 55 per cent is already seen high and market does not expect tax rates to rise significantly from the current levels.
Pay commission hikes, normal monsoons, lower interest rates (applicable to automobiles) and now GST rates have made the sector even more attractive now on a sustainable basis.
Another factor supporting the consumption theme is the expectation that there is unlikely to be any negative impact on consumer price inflation because of the GST rates as was widely feared. Motilal Oswal believes that a multiple tax rate structure with no tax for essential items will have limited impact on CPI. “Proposed GST rates are similar to current ‘overall’ rates for most goods. We estimate 15-25 bps impact on inflation from higher tax rates on 15-20 per cent of the CPI basket (including some services) with no impact on around 50 per cent of the CPI basket (food, education, healthcare) which are zero-rated and the rest with broadly unchanged rates,” added Kotak Institutional Equities in a report.
All paints companies, Hindustan Unilever, Colgate, Maruti Suzuki and Eicher Motors are the top picks in the sector.