The tax extensions on supermarkets and large scale trading operations proposed in the Budget 2013 are likely to negatively impact listed entities with retail arms, CT Smith Stockbrokers, a stockbroker with a predominantly foreign clientele said in a post-budget report.

The Budget f or 2013 presented to the Parliament by President Mahinda Rajapksa, who is also the Finance Minister on last Thursday proposed to extend the coverage of indirect taxes, National Building Tax (NBT) and Valued Added Tax (VAT) to supermarkets and large scale trading operations generating a quarterly turnover in excess of Rs.500 million.

“The proposal is expected to negatively impact listed entities with retail arms such as Cargills Ceylon (CARG), Ceylon Cold Stores (CCS) and Richard Pieris (RICH), amidst a potential erosion of margins,” CT Smith said in their report.

The report further noted that taking into account the Maximum Retail Price (MRP) for products, supermarket operators will likely now sell at the prescribed price, depriving the benefits reaped by price sensitive consumers who previously benefited from efficiencies in supermarket operations through discounted prices on some products.

“However, retail operators are likely to seek a greater margin from suppliers to mitigate the impact, which could then lead to an overall increase in the MRP,” the report said.

However, as the report further pointed out, suppliers in turn will likely to increase product prices to protect margins, though the extent of price increases may be limited given tightening macro economic conditions, as most manufacturers have already taken price increases this year so far to recover cost escalations, which could then lead to an overall increase in the MRP.

The Budget proposal also stated “As the threshold is high, small boutiques and shops will not be liable for these taxes”.

According to CT Smith, if supermarkets are obliged to unilaterally pass on the higher taxes to customers, the segment may likely see a decline in its customer base to smaller grocery stores, as the possible price increases may be higher than what consumers may be willing to pay for the convenience of shopping at supermarkets. The proposal does not specify the rates nor the products on which the taxes will be applied. Currently, certain staple products are exempted from VAT.

The proposal is expected to generate Rs.5.3bn in revenue for the GoSL in 2013E, the highest amount from all new proposals.

However, retailers are still awaiting for further clarification on the tax impositions to measure the extent of the impact on profitability.