From the midnight of June 30 India readied to embrace the GST regime.
A recent World Bank Enterprises Survey noted that about half of the Indian firms i.e. roughly 4% torch bearers of the formal sector believed that they were competing against informal firms, where malpractices are next only to obstacles such as corruption, power shortage and high levels of taxes.
The GST regime expects unorganized sector to shift to formal sector. Stock market gurus see this as an major emerging theme for the stock market under the GST regime. The new tax regime will replaces 17 taxes such as central excise duty, service tax, value-added tax, and 23 cesses.
Informal sector and GST regime
Unorganized sector accounts of 50-70 per cent of market share in building materials segments such as ceramic tiles and plywood & laminates.
Unorganized players hold market shares of 40-45 per cent in plastic and packaging sectors; 25-40 per cent in the electric equipment segments such as fans, lights, pumps, batteries and switch gears; 78 per cent of the dairy industry; 70 per cent of apparels; 75 per cent of jewelry and as high as 85 per cent in the diagnostic space. Approximately 50% of footwear space. The market of automobile accessories and cycle accessories are also mostly belong to informal cottage sector.
Formal sector players i.e. big companies point out that all of these players are doing malpractices where they claim input credit based on fake invoices, non-payment of taxes collected from customers and incorrect classification of goods in order to evade taxes.
Level playing field in GST Regime
It is expected under compliance of GST regime, compliance cost of such informal players, huge in numbers, will rise, rendering them less competitive, says GST regime experts. Another GST regime expert told that GST being a structural reform will alter the traditional business practices. Though several products in the Oil & Gas segment are out of the GST regime ambit, the companies’ ability to claim input credits will be impacted. GST implementation will broadly usher in two major changes:
1. Unorganised sector may become organised and come under the tax net
2. Companies that operate on thin margins will go out of business.
Another GST expert opinion is it would be a huge positive for the stock market. The rates of GST regime or tad below existing levels or as per expectations, except for a few sectors.
GST helps easier logistics for FMCG companies and retail, where rates have come down from existing levels. At the same time, availability of input credit will help companies lower effective tax rates significantly.
They would also benefit from the shift from unorganized to organised sectors under the GST regime. Experts point out that the formalization process to be a game changer for consumer staples, jewelry, paints, auto parts, pharma, hospitals diagnostics and agro-chemicals sectors. Most of these sectors are already seeing a shift towards the organised sector, translating into larger market shares for the organised sector, the brokerage said. Here are a few companies that are likely to be key beneficiaries of GST regime roll out.
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