CLSA has trimmed weight on ITC in its model portfolio to ‘neutral’ on concerns a shortfall in revenues from GST could lead to an increase in taxes on tobacco and coal. ITC shares ended almost flat at Rs 244.2 on Monday. The brokerage said a potential GST cess increase for coal would be negative for Coal India. Why will there be a shortfall in GST collections? CLSA said state governments’ tax revenue, including GST, grew just 1 percent in AprilAugust 2019 from a year ago period compared to the budgeted growth of 20 percent. “Given the regulatory constraints of the states, the fiscal deficit for states needs to be contained within 3 per cent of GDP barring a few exceptions. States also do not have a cushion like the RBI, PSU dividends or disinvestment,” the brokerage said.
States are likely to make expenditure cuts, mainly in capex. With the government promising 14 per cent GST revenue growth to states, the GST cess shortfall will need to be borne by it, said CLSA. The brokerage said the GST çess shortfall could be Rs 8000 crore this year but that could double or treble in the next financial year. “At the Apr-Aug 2019 growth pace of the SGST, we estimate the central government may have to give compensation of Rs 1.06 trillion to states for the GST shortfall,” said CLSA. Market participants believe whenever the government needs funds it turns to the cigarette and coal sectors by increasing taxes there. “This (the shortfall) raises concern of a possible sharp GST increase on tobacco and coal (cess products) which could be mitigated if GST grows 17 per cent in FY21,” CLSA said. “Weakness in state finances could end the past two-year tax hike-free run for ITC.”