HUL, Colgate among Nomura’s top picks in case of GST slab rejig

With the 15th Finance Commission recommending the merging of the 12 per cent and 18 per cent tax rates, the Good and Services Tax (GST) Council is set to take up the proposal in its next meeting in March.

The rate rejig, analysts say, will alter the tax burden on companies, which they expect to get passed on to the consumers. However, those at Nomura caution that the pass-on effect may be limited as the overall demand scenario remains challenging.

“In general, the companies will pass on / reduce the burden of higher / lower taxes. However, the falling or rising of taxes impacts demand and pricing power of companies. It is possible that a part of the tax reduction / rise may not be passed on due to the demand scenario,” wrote Mihir P. Shah and Abhishek Mathur of Nomura in a February 22 co-authored note.

Currently, GST has four slabs – 5, 12, 18 and 28 per cent. Over the peak rate, there is a cess on demerit items and luxury goods (automobiles, tobacco, and alcohol). The GST council plans to consider rationalising tax rates now, in order to bring them close to being revenue-neutral and make the indirect tax regime simpler.

Advantage consumer companies

Penetration-driven growth is the most important volume growth driver for staples. Hence, any GST rate reduction will benefit organised companies, analysts say. According to Nomura, consumer companies – the majority of which fall under the 18 per cent GST bracket – are likely to benefit the most from rejig. It believes that any reduction in this rate will benefit almost all companies, with Hindustan Unilever (HUL), Colgate and Britannia being the top beneficiaries.

Meanwhile, only a few categories fall under the 12 per cent GST rate, and any increase in this rate will be a marginal negative for Nestle and Dabur, which may pass on the tax increase by taking price hikes.

“Under the anti-profiteering regulation, reduction in tax rate has to be passed on to the consumer. While companies will not benefit from the rate reduction, they will benefit as goods will become more economical in the hands of the consumer and trading-up becomes easier. It will also continue to drive the shift from unorganised to organised sectors,” Nomura said.

The research and brokerage house further said that since any rate reduction will further lower the average revenue-neutral-rate (RNR), in order to make up for the deficit, there can be a potential increase in the sin goods bracket (28 per cent), which can potentially increase the tax for tobacco companies.

In the consumer durables universe, companies like Crompton and Havells have 60-70 per cent of their revenues coming from the 18 per cent GST rate slab. “So, this could benefit them meaningfully as goods become more affordable and competitiveness of organised segments increases further,” Nomura said.

In the auto segment, tractors is the only category with a GST rate of 12 per cent. A hike in rates here could lead to an increase in tractor prices, Nomura said.

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