A Bollywood Fantasy Comes True

Barring a last-minute plot twist, the nation will establish a common market and scrap many state levies.

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.

Silver Screen Streak

Cinema operator PVR has had a stellar run, and may keep on winning

Source: Bloomberg

If Prime Minister Narendra Modi's government can secure the passage of legislation to introduce a nationwide goods and services tax through the upper House of Parliament on Wednesday, PVR will be rid of a 27 percent entertainment tax 1 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 percent 2 , 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 percent 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 66 rupees in taxes on a bag of cement that retails for 300 rupees ($4.50). Expect this to fall to 46 rupees 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.

Pretty Taxing

The levies Indian companies must currently pay are many and complex

Source: Religare

Note: Illustration of taxes on selling in another Indian state something that costs 1,000 rupees to make.

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 President 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.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. These taxes vary wildly, and are as high as 40 to 50 percent in the more populous states, according to PVR's 2014 annual report. http://static1.pvrcinemas.com/pvrcms/financial/1414231272219.pdf

  2. That might be the standard rate; in reality, there will be multiple categories depending on whether the government views a product or service as a necessity or a luxury. 

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net

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