ICRA: Premium non- leather footwear products to benefit under GST
The Goods and Services Tax (GST) rates for the footwear products will be a two-tier structure –footwear with MRP up to Rs. 500 is proposed to be taxed at the rate of 5% and footwear with an MRP of more than Rs. 500 is proposed to be taxed at the rate of 18%.
Category I: Footwear with MRP up to Rs. 500
Currently, the affordably priced plastic and Hawai footwear enjoys a concessional VAT rate in most of the jurisdictions and the category’s average indirect taxes are ~4%. At 5% GST, the tax impact of this segment has increased. For footwear other than Hawai and plastic, the current average indirect tax incidence is at around 10.20% (range is 0-14.5%) which will come down to 5% post GST. However, the variation in indirect taxes in this category is significant across states and players with sales concentrated in states such as Delhi and Haryana, which have lower taxes, are likely to see an increase in tax liability and players operating in states like Maharashtra and Gujarat (where current taxes are higher) are likely to benefit under the GST.
Category II: Footwear with MRP between Rs. 500 and Rs. 1000
In the intermediate segment, for footwear between the Rs 500 to Rs 1000 MRP category, the impact is negative for all product categories as indirect tax burden of all segments will go up under GST. The increase in indirect tax liability will be up to ~9% in certain states.
Category III: Footwear with MRP above Rs. 1000
In the most expensive segment, Hawai and plastic footwear with MRP above Rs 1000 will lose the preferential treatment across many states, which will increase the tax liability significantly. Leather footwear priced above Rs. 1000 enjoyed a lower central excise duty of 4.2%, post abatement and with fitment in 18% GST, this segment will see its indirect tax incidence go up.
The segment excluding Hawai, plastic and leather is the biggest beneficiary under the GST. This segment includes sports shoes, casual shoes, textile-based products and other premium footwear products priced above Rs. 1000. Currently, this segment does not get concession either from the Centre or states and faces the highest indirect tax burden. The average indirect tax incidence for these products across states is ~22%, which will now come down to 18%, leading to lower indirect tax burden for this category.