Quick take GST changes: Calamity cess is not equal to sin tax; positive for ITC

January 11
16:56 2019

– Kerala allowed a percent calamity tax across goods and services
Sets a precedence
– Special situation burden not to be exclusively levied on sin goods
Increase in GST exemption limits positive for FMCG distribution

Kerala has been allowed to levy a maximum calamity cess of a percent on intra-state sale of goods and service for a maximum period of two years to fund rehabilitation work. This decision of the Goods & Service Tax Council is already backed by the constitution provision (Article 279A), which allows it to raise fiscal resources for a specified period to deal with natural calamities.

Special situation burden not to be exclusively levied on sin goods

Earlier expectations for calamity cess included implementing the calamity cess on goods and services on a pan-India basis and targeting only products like cigarettes. Earlier this week , the GST ministerial panel favoured limiting it to Kerala, levying calamity cess of a percent on goods and services decided by it. The GST Council has now allowed for a maximum calamity cess of a percent on intra-state sale of goods and service for a maximum two year period.

Implication of this development is straight forward and means that special situation burden would not be exclusively levied on sin goods like cigarettes and other tobacco products. This also sets a reference for future as the GST legislation provides for levy of special taxes for a specified period to raise additional resources during any natural calamity or disaster. Hence, on each such occasion tobacco companies may not be on the receiving side.

Stock reaction

Stocks in this segment like ITC, Golden Tobacco, Godfrey Phillip, VST Industries and NTC industries have positively reacted to the news. Of this, we remain positive on ITC. In our previous note, we had highlighted possibility of higher taxation as a key business risk and this aspect has moderated with the new development. ITC’s cigarette business has stabilised recently after adverse impact of the GST implementation.

Few of ITC’s other businesses have witnessed encouraging growth traction in recent times: volume growth in the FMCG business and growth outlook in the hotel and paper business. The stock (26 times FY20 estimated earnings) is currently trading at a significant discount to the FMCG sector’s trading multiple.

Other changes –positive for FMCG distribution

The GST Council has also made few changes for small and medium enterprises, which includes doubling the exemption limit for the GST registration and relaxation in the composition scheme. This may be good news for various retailers who may want to avoid incremental cost and time for GST compliance.

It is evident from various corporate commentaries post-GST implementation that the wholesale channel has shrunk on account of difficulty with GST compliance. While various companies have already tied up their supply chain infrastructure and increased their direct reach over this period, GST changes can still bring relief to retailers, small traders, grocers from GST compliance issues and hence can have a positive impact on the supply side.

Having said that it is not necessary that every trader would opt for it as then they may not be able to claim benefits of input tax credit.

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