With GST, Bollywood tax fantasy is turning into reality
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Singapore: After being a Bollywood fantasy for a decade, the idea that India could one day establish a common market is on the cusp of becoming reality. It’s fitting, then, that businesses’ relief at escaping 29 different state markets and their idiosyncratic tax practices should get captured so well by the stock price of PVR, the country’s largest cinema chain.
If Prime Minister Narendra Modi’s government can secure the passage of legislation to introduce a nationwide goods and services tax (GST) through the upper House of Parliament on Wednesday, PVR will be rid of a 27% entertainment tax on ticket sales in various states, as well as a levy on food and beverage revenue.
Instead, the multiplex operator will pay a GST to Modi’s federal government. What’s more, this tax, likely to be pegged at 18%, will be on the value added. That means PVR can claim credit for the service levy embedded in what it pays vendors. According to brokerages Emkay Global and Edelweiss, all this could well mean a 4 to 5 percentage-point increase in the company’s Ebitda margin, which has ranged between 14 and 18% over the past five years. No wonder the stock has jumped by a third over the past three months.
The entertainment industry will be just one of many winners. Governments, federal and state, currently charge Rs66 in taxes on a bag of cement that retails for Rs300 ($4.50). Expect this to fall to Rs46 with GST, says Kotak Institutional Equities.
What cement makers such as billionaire Kumar Mangalam Birla’s UltraTech are unable to retain will probably be passed on in the form of lower prices. Cheaper building materials could lead to higher sales volumes and stoke buyer interest in more competitively priced homes. Ditto for auto demand. Tata Motors, Maruti Suzuki and Bajaj Auto — and their customers — might benefit from lower tax rates on small cars, motorcycles and commercial vehicles.
Amending the constitution so that states surrender some of their taxation authority to the federal government will be just the start of a laborious process. Deciding the details — for instance, whether cream biscuits should be taxed at the same rates as ordinary biscuits — won’t be an easy task in a noisy democracy. Add to that the time taken to roll out computer software and get everybody familiarized with the new system, and Credit Suisse analysts reckon that GST implementation might take a year or longer.
Only then will it become clearer whether Indian-made goods and services will also become significantly cheaper to export. If by that time Donald Trump’s isolationist policies succeed in bringing global trade to a standstill, India won’t get the full benefit of becoming a more competitive producer. Such a cruel plot twist so late into the movie would be too bizarre even for Bollywood. Bloomberg