New Delhi: FMCG stocks are up by 3% on Friday after the goods and services tax (GST) Council released a first list of rates on most consumer goods. Investors appear to be concluding that a lower tax rate means earnings will benefit, but they may be jumping the gun.

The government had already indicated that it intends that broadly the tax rates will be the same or lower. So this should not be a surprise. Even if it was better than expected, they seem to be forgetting the anti-profiteering clause risk.

Hindustan Unilever Ltd’s management, in its post-results conference call, very categorically said that the net benefit from GST rate changes will be passed on to consumers. Other companies too will have to do that. The government will be monitoring prices to see that it happens.

Unless companies manage to use creative means to avoid passing on savings, and risk the wrath of the government, a lower tax rate is not going to flow to profits.

That does not mean companies don’t benefit from GST. The more sustainable benefits are structural, from having a common market, in functions such as production (fewer manufacturing units) and operations (a more efficient supply chain).

It should create a more level-playing field versus the unorganised sector, contribute to cost savings, and eventually result in higher sales growth. These factors will play out in the longer run, but then they were known.

Most FMCG companies have raced to set up new capacities in FY17, in tax havens such as Assam, to beat the 31 March deadline for the end of these exemptions. These companies don’t pay excise on output from these locations. These companies are expecting that they will pay GST and then claim refund, but are awaiting clarity on the refund mechanism.

On cigarettes, the basic GST rate will be 28% to which will be added a compensation cess of 5%+ a fixed amount per thousand sticks that varies with the length of the cigarette. The cess seems higher than what was being considered earlier, where it was mentioned that the cess will be a maximum of Rs4,170 per thousand sticks.

Now, filter cigarettes of a length not exceeding 65mm will attract 5% plus Rs1,591 per thousand sticks and more than 75mm will attract 5% plus Rs4,170 per thousand sticks. The current tax rate at the highest slab is Rs4,421 per thousand sticks.

A more stable tax regime for cigarettes for ITC Ltd is no doubt positive but this too was known earlier as the Council had fixed caps on the cess in March. If anything, the cess appears to be higher than what was reported earlier.

The 3% increase seen in FMCG stocks, therefore, does seem overdone. Valuations were anyway relatively expensive. GST will certainly lead to fundamental changes in the way the industry does business, which will evolve over a number of years.

Rates alone shouldn’t make much of a difference. Some disruption in the near term can be expected, as the transition date approaches.