Stocks of footwear makers rallied after the Goods and Services Tax (GST) Council announced dual tax rates on the item.
Under the new indirect tax regime, footwear costing less than Rs 500 will be taxed at 5 percent, while those costing more than that would attract a tax rate of 18 percent.
The market was expecting a single slab of 12 percent as against the two slabs announced, said Sushil Batra, chief financial officer of Relaxo Footwear Ltd. The stock rallied as much as 6.5 percent intraday on Monday. The 5 percent GST rate will be tax neutral, he added. The company gets about 70 percent of its revenue from the under Rs 500 category.
Batra said the maximum impact would be seen in Rs 500-1,000 category. Currently, this bracket attracts an excise duty of 6 percent and value-added tax in the range of 8-9 percent. This will come under the 18 percent slab under GST.
Since the company will be able to avail of the benefits of input tax credit, it will not have to undertake any price hikes with the exception of products in the Rs 500-1,000 range.
The category above Rs 1,000 is currently subject to 12 percent excise and 14 percent sales tax. At 18 percent GST, it stands to benefit the most.
The dual rate of taxation will encourage evasion in some unorganised pockets, Batra warned.
Other footwear makers like Bata India Ltd. and Liberty Shoes Ltd. also rallied between 3-4 percent. Liberty Shoes expects prices to go up 5-10 percent in the next month or so before the GST rates kick in on July 1.
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