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1ST – 30TH Sep 2014 . Vol 1 Issue 9 . For Private Circulation Only
pg 30. INTERVIEW: Atanu Bagchi
pg 32. Indian Economy – Trend indicators
3GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 2
VOL 1 . ISSUE 9 . 1ST - 30TH SEP 2014
Vineet Bhatnagar- Managing Director and CEO
EDITORIAL BOARD:Naveen Kulkarni Manish AgarwallaKinshuk Bharti Tiwari Dhawal Doshi
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RESEARCH Automobiles Dhawal Doshi, Priya Ranjan
Banking, NBFCs Manish Agarwalla, Paresh Jain
Consumer, Media, Telecom Naveen Kulkarni, Vivekanand Subbaraman, Manish Pushkar
Cement Vaibhav Agarwal
Economics Anjali Verma
Engineering, Capital Goods Ankur Sharma, Hrishikesh Bhagat
Infrastructure & IT Services Vibhor Singhal, Varun Vijayan
Metals Dhawal Doshi
Mid-caps Vikram Suryavanshi
Oil & Gas, Agri Inputs Gauri Anand, Deepak Pareek
Pharmaceuticals Surya Patra
Retail, Real Estate Abhishek Ranganathan, Neha Garg
Technicals Subodh Gupta
Production Manager Ganesh Deorukhkar
Database Manager Vishal Randive
Sr. Manager – Equities Support Rosie Ferns
SALES & DISTRIBUTION Kinshuk Tiwari, Ashvin Patil, Shubhangi Agrawal, Kishor Binwal, Sidharth Agrawal, Bhavin Shah, Dipesh Sohani, Varun Kumar
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3GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 2
LETTER FROM THE MANAGING DIRECTORIt has been almost 14 years since at least initial talks about
GST implementation started in India and about six years
since official discussions between the centre and states
began. GST is present in 150 countries across the world,
and it is high time India brought its taxation standards up
to international levels. With the NDA government winning
with a resounding majority in the recent national elections,
and with a lot of states under the control of the BJP, the
implementation of GST has now started looking like a dis-
tinct possibility. To implement it in a smooth manner, India
needs an IT superstructure in place and needs to make
the taxation process as smooth as possible to ensure
widespread participation. Above all this, concerns of state
governments need to be mollified and addressed.
While GST, widely known as a consumption tax, is likely
to burden consumers to some extent (at least in the short
term), it is also likely to widen the government’s tax net.
and help the government get its finances in order. It will
also benefit companies to a large extent immediately and
possibly increase their margins....at the very least, it will
ease their tax administration process and will enable them
to make business decisions based on profitability and eco-
nomics and not on how much tax it will have to shell out in
which area - this will eventually benefit the same consum-
ers who have had to shell out a bit extra due to GST.
In short, on the positive side, GST will change the taxation
system in India drastically, it will broaden the tax base
(provided minimum exemptions are given), and it will re-
duce distortions in taxation by switching to the destination
principle. On the negative side, in the short term, it could
burden the consumer and lead to a spurt in inflation.
In our latest issue of Ground Zero, our economist Anjali
Verma will take you on a comprehensive tour of issues sur-
rounding GST in India, experts’ opinions on the subject,
its likely path of implementation, and the pros and cons
that it will bring. Hope you enjoy this very interesting and
informative journey.
Best Wishes
Vineet
4. COVER STORY: GST A Fine Balance
Ground Zero takes an in-depth look at GSP in India, its likely path of implementation and the pros and cons
30. INTERVIEW: Atanu Bagchi
CFO CanFin Homes Ltd
Gaining Momentum
32. Indian Economy – Trend indicators
34. PhillipCapital Coverage Universe: Valuation Summary
CONTENTS
5GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 4
5GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 4
COVER STORY
Indirect tax system in India is still fraught with complexities and a cascading burden for
the industry. Goods and Services Tax (GST) — aims to simplify the tax structure (more
than VAT), eliminate any cascading effect, increase transparency, and boost government’s
tax revenue. The NDA government is serious about implementing GST; many states have
agreed and negotiations are going on with the rest. GST will bring significant gains to
companies (tax credit benefit across the value chain) along with the advantages of a simple
tax structure. GST will facilitate fiscal consolidation because of wider coverage and higher
compliance. The flip side is that taxing consumption – which is the basis of GST – could
dampen demand in case the burden on the consumer proves excessive, at least in the short
term, until competitive forces even things out. The inflationary impact of GST will be based
on the rate. While the form of GST may be debated (minimal exemption will bring in the
best results), its introduction is vital. GST rollout is realistically possible from April 2016.
BY ANJALI VERMA
pg. 6 Why GST and its tax structure VAT to GST – Structure debatable, but its introduction is vital______________________________________________pg.16 Tax experts speak GST introduction is critical even if it’s imperfect______________________________________________pg.22 GST sectoral impact Impact on sectors largely positive______________________________________________pg.25 GST macro impact Positivefortheeconomyandforemployment;short-termnegativeforinflation______________________________________________pg.27 Global GST Structure Well-established globally, a step forward to meet international standards______________________________________________
7GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 6
Why does India need GST so desperately?
India has a very complex, multi-layered and highly
inefficient tax structure, which stems from its fed-
eral structure — the centre and state both charge
multiple taxes at different stages of the supply
chain. A partial solution came in the form of VAT,
but it did not iron out most of the inefficiencies
of the system. GST will alter India’s tax landscape
quite dramatically.
Under GST, all multiple taxes (or most of them at
least) will be merged under one unified tax rate
and the centre and state governments will charge
single tax rate as compared to a host of taxes
charged in the current regime. After the initial hic-
cups, this will simplify tax administration and col-
lection to a huge extent for both the central and
state governments. GST is expected to change
India’s tax structure permanently and for the
better — taxation will switch to the ‘destination
principle’. It will broaden the tax base significantly,
provided minimum exemptions are given. It will
help build a common India-wide market across the
country instead of the state-specific many markets
that exist now and reduce compliance costs. Busi-
nesses will be able to take logical decisions based
on profitability and economics, rather than illogical
ones based on tax concerns.
However, despite all the known positives, GST is
a politically charged subject — states fear losing
their autonomy over taxation and manufacturing
and exporting states fear a loss of revenue. The
immediate tangible result of GST implementation
is likely to be higher prices for consumers, which
may not go down well for obvious reason; it will
VAT to GST – Structure debatable, but its introduction is vital
W H Y G S T A N D I T S T A X S T R U C T U R E
eventually indirectly help the end-consumers
because industries may pass on the benefit with
time and the government may lower direct taxes
as revenues from indirect taxes rise.
When VAT was implemented, there was probably
not a single trade and industry segment that did
not register some kind of protest with the govern-
ment. . The most vociferous protests were from
the trader lobby — more than 100,000 traders
from all over the country converged on the Ramlila
grounds in Delhi (in 2003) to protest the introduc-
tion of VAT. While ostentatiously their reasons for
the protests were the possibility of harassment by
tax inspectors and the need to maintain ‘pucca’
records, which they moaned were ‘cumbersome’
and would lead to harassment, even then, the
real reason was believed to be different — under
VAT they found less scope for tax evasion. GST
will probably fare better as far as the trade and
industry segment is concerned, because unlike
VAT, which only partially solved problems while
sometimes creating fresh ones, GST is actually ex-
pected to make things far easier for the business
community.
“A simplified tax regime through GST will certainly have a positive impact on sectors like pharma, auto, logistics, retail and FMCG. However, liquor and petroleum industries may not benefit in light of their likely exclusion.
Consumers may be benefited as end prices could come down in the long run.”
7GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 6
Year Milestone
1935 Govt of India Act, 1935 made tax on sales of goods a provincial subject
1939 Sales Tax introduced in India in the State of Madras
1941 Sales tax introduced in the State of Punjab
1974 LK Jha Committee suggests VAT
1986 MODVAT introduced in India from 1st of March on select commodities
1991 Chelliah Committee recommends VAT
1994 Introduction of Service tax in India
1999 FMannouncesdecisiontointroduceVATinIndia.
Formation of Empowered Committee on VAT
2002 Task Force on Indirect Taxes report headed by Kelkar.
CENVAT introduced on all commodities at central level
2003 VATintroducedinfirstIndianStateofHaryana
2005 VAT in 24 States/UTs including Punjab, Chandigarh, HP, J&K and Delhi.
2006 VAT implemented in 5 more States including Rajasthan.
2007 FMannouncesGSTintroductioninIndiafromApril01,2010.
VAT implemented in Tamil Nadu & Puducherry.
CentralSalesTax(CST)phaseoutstarts,CSTcutto3%.
Joint Working Group set up for proposing GST roadmap and structure.
2008 VATintroducedinthelastIndianStateofUPfromJanuary01,2008.
CST reduced to 2%
2009 Empowered Committee released First Discussion Paper on GST on 10th Nov.
ReportofTaskForceonGSTof13th FinanceCommissionon15thDec.
Reportof13th FinanceCommission(TFC)submittedon29thDec.
Chronology of Sales tax/VAT/GST reforms in India
Income TaxCorporate TaxEstate DutyWealth Tax
Direct Tax
Excise DutyCustom DutyService TaxSales Tax / VATSTT
Indirect
Tax
Following the success of indirect tax reform in the
form of VAT, the central government is now focused
on introducing another big reform in the form of
GST (Goods and Service tax). GST was proposed in
the FY08 budget and its implementation deadline
was set at April 2010. Stiff resistance erupted from
BJP-ruled states while Congress-ruled states were
in favour. Now that the BJP-led NDA government
is at the centre, GST should see the light of day.
While states are wary of loss of fiscal autonomy and
revenues because of GST implementation, the cen-
tral government believes its introduction will bring
revenue gain, fiscal consolidation, and higher GDP.
Discussions are underway between the centre and
state governments to arrive at a neutral path ensur-
ing gains for the exchequer (centre/states), business-
es, consumers, and the economy as a whole.
VAT was good; GST is the next step
Before VAT was introduced, the tax structure suf-
fered from multiple taxation, a cascading effect, and
varying tax rates across states and commodities.
There existed ten tax rates across the states causing
poor compliance and excessive tax evasion. The shift
from central excise duty to VAT began in the form
of MODVAT (modified VAT) for select commodities.
When this was extended to all commodities it was
termed CENVAT (Central VAT) in 2002-03. Statelev-
el VAT was fully implemented in 2008. Just as GST
is facing resistance now, when VAT was
being implemented, states had resisted
fearing revenue loss and loss of fiscal
autonomy (sales-tax formed the largest
source of revenue for states). It took 10
years from initiating the discussion to full
implementation of state-level VAT — for
GST, it has been 6 years since discussions
have been initiated.
VAT to GST – Structure debatable, but its introduction is vital
9GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 8
Current VAT slabs in India
l 0% for essential commodities (10 items)
l 1% on gold, silver, precious stones (diamonds), and
articles/ornaments
l 4% on industrial inputs, capital merchandise, and com-
modities of mass consumption
l 12.5% on other items
l Variable rates (state-dependent) are applicable for
petroleum products, tobacco, liquor, etc.
VAT exempt category
l Agricultural implements operated manually or driven
by animals
l Aids and implements used by handicapped persons
l Books, periodicals, and journals
l Electric energy
l Fresh milk, pasteurized milk, butter milk, and curd
l Fresh plants, samplings, and fresh flowers
l Fresh vegetables and fruits
l Meat, fish, prawn, and other aquatic products when not
cured, or frozen, eggs, and livestock
l Paddy, rice, wheat, pulses, salt, and flour
l Sugar
l Textile
4-5% VAT rate category
l Agricultural implements not operated manually or
driven by animals
l Communication equipment like PBX or EPABX, etc.
l Intangible goods like patent, copyright, etc.
l Capital goods
l Chemical fertilizers
l Cotton
l Drugs and medicines
l Iron and Steel
l IT products (including hardware, software, telecommu-
nication equipment, etc.)
l Industrial inputs (mainly certain basic chemicals and
minerals)
l Processed meat, fish, vegetables, and fruits
l Sports goods
l Tractors
l Transformers and transmission towers.
“Currently, the tax system drives the business in many ways and not economic efficiency. Cascading impact and no credit setting off between centre and states adds to the cost and inflates prices. Every state has a different law, filing procedures, and tax rates and incentives, influencing businesses. This results in multiple touch points with authorities, cumbersome compliances, and state-specific arbitrage.”
Revenue impact of VAT: Revenue compensation
to states was based on the loss over and above
the agreed loss due to VAT implementation by the
states, distributed monthly. Total compensation
to states for 3-years stood at Rs 132bn (100% of
loss for FY06, 75% of loss for FY07, and 50% for
FY08). Revenue growth of the VAT implementing
states rose from 13.8% in FY06 to 21% in FY07 (as
per government data). Based on a detailed study
of VAT-implementing states, no revenue loss from
indirect tax was found (few major states benefited
along with many minor states) and direct tax revenue
responded positively. However, due to large-scale
tax evasion because of poor administration, benefits
from VAT are limited.
Shortcomings of VAT: Certain taxes (such as sur-
charges, service tax, entertainment tax) are outside
the purview of VAT at the centre and state level,
causing cascading problems. Weak tax administra-
tion by the states leads to tax evasion – limiting the
benefits of VAT. Manufacturers are not able to attain
the benefits from a comprehensive input tax and
service tax set-off.
9GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 8
l Taxes on income other than agriculture in-come.
l Corporation tax.l Custom duties.l Excise duties except on alcoholic liquors and
narcotics not contained in medical or toilet preparation.
l Estate and succession duties other than on agricultural land.
l Taxes on the capital value of assets except agricultural land of individuals and companies.
l Rates of stamp duties – on financial docu-ments.
l Taxes other than stamp duties on transactions in stock exchanges and future markets.
l Taxes on sales or purchases of newspapers and on advertisements therein.
l Taxes on railway freight and fares.l Terminal taxes on goods or passengers carried
by railways sea or air.l Taxes on the sale or purchase of goods in the
course of interstate trade.
l Land revenue.l Taxes on the sale and purchase of goods, except newspapers.l Taxes on agricultural income.l Taxes on land and buildings.l Succession and estate duties on agricultural land.l Excise on alcoholic liquors and narcotics.l Taxes on the entry of goods into a local area.l Taxes on the consumption and sale of electricity.l Taxes on mineral rights (subject to any limitations imposed by
the Parliament).l Taxes on vehicles, animals and boats.l Stamp duties except those on financial documents.l Taxes on goods and passengers carried by board or inland
water – ways.l Taxes on luxuries including entertainments, betting and gam-
bling.l Tolls.l Taxes on professions, trades, callings and employment.l Capitation taxation.l Taxes on advertisements other than those contained in news-
papers.
Centre (Currently)
State(Currently)
In GST, both the cascading effects of CENVAT
and service tax are removed because it provides a
‘set-off’, and a continuous chain of set-off from the
original producer and service provider up to the
retailer is established, which reduces the burden of
all cascading effects. This is the essence of GST, and
this is why GST is not simply VAT plus service tax but
an improvement over the previous system of VAT
and disjointed service tax.
It is believed (not certain) that GST at centre and
state levels will give more relief to industry, trade,
agriculture, and consumers through a more compre-
hensive and wider coverage, higher tax set-offs (for
input and service), inclusion of various taxes in GST,
and phasing out of CST. If implemented with the cal-
ibrated tax rate and adequate state compensations,
GST may bring in higher tax gain for both centre and
states by way of higher coverage (base) and compli-
All about GSTance. Thus, it benefits the state governments, central
government, industry, trade, agriculture participants,
and consumers.
Structure of GST
l Subsuming all state and central goods and ser-
vices tax under GST
l Dual GST model – each transaction will be taxed
by centre and state; tax to be referred as Centre
GST (CGST) and State GST (SGST)
l Tax rate for CGST and SGST is currently aimed
towards revenue neutrality
l Appropriate compensation to states
l Minimalistic exemption list (goods and services)
to ensure maximum benefit; free-flow of tax cred-
it in intra and inter-states
l Uniform tax collection and filing procedures for
SGST and CGST
l Constitutional amendments to introduce CGST
and SGST (possibly two separate laws)
l Seamless IT infrastructure, online tax administra-
tion
11GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 10
Goods and Services Tax model for India: Recommenda-
tions of the Empowered Committee
l Dual GST model – GST should have two components –
one levied by the Centre (referred as Centre GST) and
second levied by the States (referred as State GST).
l Harmonious rate accepted by Centre and State. If need
be, further modification through constitutional amend-
ment.
l Rates for Central GST and State GST would be pre-
scribed appropriately, reflecting revenue considerations
and acceptability.
l Implementation will happen through dual statutes –
defined separately for the Centre and State.
l Basic features like chargeability, definition of taxable
event, definition of taxable person, measure of levy in-
cluding valuation provisions, basis of classification, etc.,
will mostly be uniform for both the Centre and State.
l Centre and State GST will be applicable to all transac-
tions pertaining to goods and services, except for the
exemption list.
l Central and State GST will have to be paid separately
to the Centre and State accounts, as states will have to
be credited back on this basis.
l Both Central and State GST benefit can be drawn sepa-
rately against Central and State GST. Taxes paid against
the centre GST can be utilised as input tax credit for
the payment only against the payment of central GST.
Same principle will be applicable for the state GST.
Although rules for taking the credit from centre and
state will be aligned, the taxpayer will have to maintain
separate accounts for both. Cross-utilisation will not be
allowed except for the inter-state supply of goods and
services.
l Uniform tax collection procedures for Centre and State
GST will be legislated.
l Concurrent jurisdiction for the Centre and State GST
for the entire value chain and all taxpayers.
l Threshold limit is suggested to rise from Rs 0.5mn
annual turnover currently to Rs 1mn under GST, for
goods and services, across all the states. Threshold for
Central GST for goods is suggested at Rs 15mn (same)
and adequately higher for services (current threshold is
Rs 1mn). It is assumed that aggregate total SGST and
CGST would be 20%.
l Floor and ceiling should be set for compounding GST;
floor rate at 0.5% of gross turnover and cut-off limit at
Rs 5mn.
l Filing tax returns periodically to centre and respective
state authorities.
l Each taxpayer would be allotted a PAN-linked taxpay-
er identification number with a total of 13/15 digits.
This would bring the GST PAN-linked system in line
with the prevailing PAN-based system for income tax,
facilitating data exchange and taxpayer compliance.
l Keeping in mind the need of tax payer’s convenience,
functions such as assessment, enforcement, scrutiny,
and audit would be undertaken by the authority which
is collecting the tax, with information sharing between
the Centre and the States.
Key features of GST in India (known so far)
l Tax rate – Undecided as yet
l Coverage – All goods and services, except the
basic exemption list. Currently states have res-
ervations on including alcohol, petroleum, and
entry tax.
l Threshold – Rs 1mn for SGST on goods & servic-
es; Rs 15mn for CGST for goods manufacturers,
adequately higher for service providers
Benefits of GST
l Simplistic tax structure – one tax (GST) in place of
many taxes
l Transparency for consumer and government
l Higher compliance as credit benefit is available
across the supply chain for goods and services
(from producer to retailer)
l Higher revenue generation due to wider cover-
age and greater compliance
l Industry to benefit significantly due to benefit of
setting-off of taxes paid across the supply chain
and tax simplicity
l Prices for the consumer are likely to fall due to
the credit benefit for the industry and services
(tax rate will be the decisive factor)
11GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 10
What is causing the delay? States are a worried lot
Currently, centre collects taxes from 66% of the
resources, and the balance 33% is left for the states.
GST can only be implemented with the consensus of
states and centre as a constitutional change will be
required. Passing the tax law would require two-third
votes in both houses of parliament, plus the support
of 15 of the 29 states to amend the constitution.
Most of the states’ objections to GST revolve around
loss of autonomy and perceived loss of revenue from
petroleum and alcohol.
However, from being wary of introducing GST, many
states have now agreed to accept GST with a few
riders and exemptions. In the UPA government’s
regime, BJP states were against GST. However, with
the NDA government at the centre and more states
also BJP-ruled, the chances of faster GST implemen-
tation are higher. So far, the response from BJP-ruled
l Central excise duty l Additional excise duties l The Excise Duty levied under the Medicinal and Toiletries Preparation Act l Service tax l Additional customs duty (CVD) l Special additional duty of customs (SAD) l Surchargesl Cesses
l VAT/Sales tax l Entertainment tax l Luxury tax l Taxes on lottery l Betting, & gambling l State cesses & surcharges l Entry tax not in lieu of octroi (inclusion undecided)l Purchase tax (inclusion still undecided)
Central Taxes
State Taxes
states (like Rajasthan, MP) is not full acceptance but
conditional acceptance. SP-ruled UP has mildly loos-
ened its stringent position against GST.
Experts believe that most of the state and centre
taxes should be subsumed under GST to ensure sim-
plicity, compliance, revenue generation, and benefit
of all tax-paying agents.
Benefits to states
The GST at the state-level is justified because:
l States get the additional power of levying service
tax
l System of comprehensive set-off relief, including
set-off for cascading burden of CENVAT and
service taxes
l Subsuming of several taxes in the GST
l Removal of burden of CST (CST has been re-
duced to 2% and will be abolished once GST is
introduced).
Taxes to be subsumed in GST
13GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 12
Treatment of various taxes (as per Empowered
Committee)
Tobacco products: It will be brought under GST with
Input Tax Credit. Centre may be allowed to levy excise
duty on tobacco products over and above GST without
ITC.
Services: Both centre and states will have powers to tax
services vs. the current structure where only the centre
levies service tax. For states, the principle for taxation
of intra-state and inter-state has already been formulat-
ed by the Working Group. For inter-state transactions,
integrated GST (IGST) will be adopted by appropriately
aligning and integrating CGST and SGST.
Integrated GST (IGST) would be levied by the centre,
which would be a combination of Centre GST and State
GST on all inter-state transactions of goods & services.
The inter-state seller will pay IGST on value addition
after adjusting available credit of IGST, CGST, and SGST
on his purchases. The exporting state will transfer to
the Centre the credit of SGST used in payment of IGST.
The importing dealer will claim credit of IGST while
discharging his output tax liability in his own state. The
centre will transfer to the importing state the credit of
IGST used in payment of SGST.
Exports: Exports would be zero-rated and similar bene-
fits will be given to SEZs (limited to processing and not
to sale from an SEZ to Domestic Tariff Area (DTA)).
Imports: Both CGST and SGST will be levied on
imports of goods and services post necessary consti-
tutional amendments. The incidence of tax will follow
the destination principle and the tax revenue in case of
SGST will accrue to the state where the imported goods
and services are consumed. Full and complete set-off
will be available on the GST paid on import on goods
and services.
Special Industrial Area Scheme: It has been decided
that industrial benefits/incentives should be given in
cash once GST is implemented. This is aimed at not
disturbing the continuous chain of set-offs against GST.
Current benefits will be allowed to continue until the
expiration of the scheme for both centre and states. Any
new exemption/remission etc. will not be allowed, ben-
efits will have to flow in the form of cash after receiving
GST.
The state’s list of concerns include
l Loss of revenue and fiscal autonomy: Industrial
states like Gujarat, Maharashtra, and Tamil Nadu
receive 77-80% of revenue receipts from their
own taxes while it is at 27-28% for states such as
Bihar and J&K (rest of the revenue comes from
centre allocations). Total losses to all the states
are estimated by the National Institute of Public
Finance and Policy (NIPFP) at Rs 320bn, based
on calculations taking 2007-08 as the base year.
On the other hand, the task force under the 13th
Finance Commission has suggested a provision
of Rs 500bn as compensation for 5 years.
l Quantum and timing of compensation from
centre: The Empowered Committee has recom-
mended that adequate compensation should
be provided to states for the loss that might
emerge due to GST implementation for the next
five years released as special grants to the states
every month on the basis of a neutrally moni-
tored mechanism.
l Producing states at loss: GST is a consump-
tion-based tax and not origin based. Under GST
structure, the tax would be collected by the
states where the goods or services are actually
consumed i.e., where the goods are actually sold
and not the state where it is actually originated.
Hence, losses could be heavy for producing
states. States (Gujarat, MP) that were focused
on manufacturing developed huge infrastructure
and will suffer. However, the centre believes that
there is no evidence yet that exporting states will
suffer.
l The rate of GST
l Entry tax, alcohol, and petroleum goods should
not be subsumed in GST. States are being
convinced and the possibilities of allowing states
to levy additional taxes (over and above SGST)
in lieu of entry tax, petroleum products, and
alcohol, are being considered.
l States demand legal control of central GST up to
a limit of Rs 15mn — centre is willing to give only
administrative control. States are worried that
their small businesses will fall under centre GST.
Dual-control is prescribed and accepted above
Rs 15mn.
l Control over small traders in the new tax regime.
13GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 12
Treatment of alcohol: Close to 20% of the states’
revenue is generated from alcohol; it is the sec-
ond-largest source of revenue for states after sales
tax – and the reason states are wary of letting go
of alcohol taxation to GST. Alcohol consumption is
barred in Gujarat, Nagaland, Mizoram, and Manipur.
For Tamil Nadu, 27% of the revenue came from alco-
hol in FY13 and for Kerala, it stood at 22%. Alcohol
is subject to multiple taxes under the current regime
— central excise and state VAT on manufacture and
production, sales tax, entry tax, and octroi on sale/
movement of goods.
The central government is in favour of including
alcohol under GST for the following reasons
l To avoid cascading effect – Tax cascading has
adverse impact on volumes, prices, and growth
of the sector and resultant lower revenue genera-
tion
l If alcohol industry is kept out of GST, impact of
CGST and SGST on inputs and services for which
no credit is given will have adverse impact on
the margins and result in higher prices. Inclusion
will facilitate free flow of credits across the value
One expert that we spoke with was of the view that GST will be implemented without including petroleum and alcohol; states will agree for entry-tax inclusion – Not a perfect GST
Issues of different states:
Uttar Pradesh: Threshold limits, tax-free goods, tax rates,
dual control, place of supply rules and revenue-neutral
rates. Crude, high-speed diesel, petrol, natural gas and
aviation turbine fuel within the purview of the levy. UP has
demanded that light diesel oil, furnace oil, residual furnace
oil and tobacco and tobacco products should also be kept
out of GST.
Rajasthan: Has demanded that petroleum should be as
a state subject, clarity on tax transactions when goods
are transported from one state to another, merging entry
tax into VAT, seek right to levy additional VAT on tobacco
products, and that right to levy entertainment tax for local
bodies should rest with the state administration.
Madhya Pradesh: Alcohol and petroleum should be
exempted, timely compensation by the centre. After a
meeting on 20th August MP has fully favoured the GST
implementation.
Karnataka, Tamil Nadu, and Kerala: These states are
hubs for manufacturing, services, and technology and
stand to lose the most if the government bans them from
collecting local taxes without offering a substitute. In fact,
in a presentation to the union finance minister, Tamil Na-
du’s finance minister, O Panneerselvam, had made it clear
that he was concerned about the impact of the proposed
GST council on the fiscal autonomy of states and the huge
permanent revenue loss it is likely to cause to Tamil Nadu,
which is a net exporter with a large manufacturing industry.
West Bengal: WB finance minister Amit Mitra had said
that while his party supports GST, there were concerns
about compensation. He was recently quoted saying the
Centre told the state (WB) that it will not be given Rs 36bn
(in lieu of CST being reduced from 2011-12) as compensa-
tion to be able to move towards GST. He had said that his
government ‘lacks confidence’ about the centre’s assur-
ance on this issue.
chain. GST will provide credit on inputs and input
services
l Exclusion will make tax administration of the
industry too complex and costly for the govern-
ment
l Exclusion will have adverse impact on trade part-
ners (restaurants, transporters, stockists, distrib-
utors) and other industries (pharma and perfume
manufacturers as alcohol used as raw material)
l Inclusion will lead to better competitiveness in
domestic and international markets: No sticking
costs
In India, it is being recommended that centre should
apportion CGST collections on alcohol with states
and SGST should be adjusted to ensure revenue
neutrality.
15GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 14
Internationally, alcoholic beverages are taxable at
two levels
l VAT / GST (as the case may be) – levied on mov-
able goods and services (with few exceptions)
l Excise duty (non-recoverable) – levied only on
specific goods.
l VAT / GST paid on inputs can be off-set in the
hands of registered manufacturers
Treatment of petroleum products: Out of the total
indirect tax collections of the centre, approximately
23% came from petroleum taxes in FY14. For states
it stood approximately at 10-12%.
Current tax treatment of petroleum products
l To central government: through customs duties,
cess on crude oil, excise duty and service tax
charged on input of services.
l To state government: through sales tax/ VAT and
central sales tax
l In addition to central and state taxes, octroi and
entry tax are revenues that accrue to local bod-
ies.
Problems with the current regime and exclusion from
GST will result in:
l Cascading of taxes, which will have price impact
on other sectors; this is because petroleum is a
key input for various industries (railway, water,
airways, fertiliser)
l Making exports of petroleum products uncom-
petitive
l Impact revenue collection
A study done by NIPFP has shown that GST imple-
mentation will either lead to prices of petroleum
goods remaining unchanged or declining (except
for tax exempted sectors). These results suggest
that there is little reason for leaving out petroleum
products from GST.
Entry tax is a tax imposed on the movement of
goods from one state to another — it is levied by
the recipient state to protect its tax base. It’s a tiny
tax but amounts to huge complexities in compliance
and also results in discrimination of goods. This tax
was earlier levied by local civic bodies on mere entry
of goods into its local area and collected in cash at
check-posts by the road side. There was no mech-
anism for collecting the tax on trains or air cargo.
Given the inefficiencies of collecting it at the entry
point, the tax is now levied on the basis of informa-
tion in the accounts of the dealers.
The entry tax is an impediment to free flow of trade
and is a source of competitive distortions and inef-
ficiencies in the supply chain. Gujarat has already
eliminated entry tax by increasing its VAT. Entry
tax has been held unconstitutional by various high
courts across the country.
To address the concerns of states on revenue loss on
account of entry tax, it is being suggested that states
may be allowed to levy additional 0.5-1% rate over
and above the state GST. This amount could then be
transferred to their local municipalities.
States have agreed on
l Threshold levels for GST implementation at Rs
1mn (Rs 0.5mn for special-category states).
l Harmonise the exemption lists of states and the
centre, which has 96 and 243 items, respectively.
l MP and Gujarat have agreed to favour GST
while congress-ruled Haryana has hardened its
negative stance (pertaining to purchase tax as
the state gets Rs 40-50bn from agriculture). Tamil
Nadu stayed with its stance of fiscal autonomy of
states.
If petroleum is out, it’s not GST: Parthasarathi Shome
15GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 14
The empowered committee has decided to adopt
a two-structure approach in implementing GST —
lower rate for necessary items and a standard rate
for goods in general. Special rate will be set for
precious metals and a list of exempted items. Deci-
sion on current exemption list under VAT (to remain
exempted for an initial few years) is yet to be taken.
Similar decisions are to be taken for the exemption
list for the Centre GST. For services, a single rate is
advised for both Centre GST and State GST.
As of now, the government has not shared its
thoughts on the tax rate of GST; experts’ opinions
vary from a rate of 16% to as high as 24%. Experts
have stated that a single rate for goods and services
will be preferred. GST rate for state and centre is
not crucial for the industries and consumers. A few
government officials have stated that the two rates
being considered are 8-10% for the lower slab and
16-18% for the higher slab. In addition, states can
levy a 1% additional tax on precious metals and a list
of exempted items.
Globally, GST rates vary from 5-27%; Singapore,
Canada – 5%, OECD average – 19%, and Hunga-
ry – 27%. World average GST rate stands at 15.9%,
lower than 21.2% for 27 EU countries and 19% for
34 OECD countries. The GST rate set by the rapidly
growing economies (suitable category for India) is
lower at 12.7%. Of the 25 RGMs, 11 apply rates of
15% or more (Argentina, Chile, China, Colombia,
Czech Republic, Ghana, Mexico, Poland, Russia, Tur-
key and Ukraine), and although no RGM rate reaches
the heights of 27% (the world’s highest VAT rate,
which is charged in Hungary) four RGMs do charge
rates at or above 20%.
The government hopes to table the constitution
amendment bill in the winter session of parliament
after it agreed to address some of the concerns
including the non-payment of central sales tax
compensation (CST) and issues surrounding the
GST’s design. Since the government will need a
2/3rd majority, and considering that getting to a GST
consensus is expected to take longer, GST introduc-
tion is unlikely to happen in April 2015 as suggested
in the budget. A few tax experts that we spoke with
are of the view that considering the current pace
of negotiations with the states and requirement of
constitutional amendment, GST implementation
is possible in April 2016. Others feared that if it is
introduced in April 2015, industries are not prepared
to implement it.
Average VAT/GST rates in 2013
GST Rate Structure for India
Current Status
“Industry should be given sufficient time to structure their systems and accounts for GST — 6-9 months of preparation time should be given to corporate. As of now, very little information is available with the industry participants about GST tax rate, filing procedures, etc. “
17GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 16
GST introduction is critical even if it’s imperfect
T A X E X P E R T S S P E A K
Mr. Govind Goyal from the chartered account-
ancy firm, Govind Goyal & Co., says that GST
will bring in significant benefits for the country,
businesses, as well as consumers. If the constitu-
tional amendment and white paper are cleared by
April 2015, GST implementation is likely by March
2016. Even when GST comes in, a few differential
tax rates are expected to exist (in line with the
current exemption and necessary commodity list).
He believes that SGST and CGST should not be
higher than 15%.
Positives:
l States offering large base of services will bene-
fit hugely.
l Consumer – benefits from transparency in tax
payment — will be able to choose amongst
the goods where tax levy is lower.
l Industry – GST will be the only one tax to
comply with; this will simplify tax payment and
administration for companies.
l Government – revenues will rise as tax base
will widen and leakage on taxation will reduce
substantially. Black economy will translate to
white economy.
l Cost efficiency will make Indian exports more
competitive.
Concerns:
l Government has not analysed the impact of
GST on trade and industry — their perspective
needs to be understood before implementa-
tion.
l Dual structure is a problem as CGST credit
may not be set-off against transaction all over
India while SGST credit can be utilised all over
India. Single-rate GST would have been the
preferable choice — revenues could be shared
between centre and states. States do not want
to let go off taxation powers.
l No significant study has been done on the
appropriate GST rate for India.
l Administration of GST at state and centre level
will be tedious for the taxpayer (for example,
same invoice will have to be shown to state
and centre authorities for credit purpose).
Clarity needed:
l Treatment of sectors and threshold exempted
currently
l Treatment of the Special Economic Zones
l Availability of CGST credit on purchase of
goods inter-state
l Manner in which IGST credit will be made
available to the taxpayer
l Place of supply rule should be clearly defined –
there is no clarity on the treatment of move-
ment of services and its credit benefit across
states
Advice to the government:
l Threshold limit of Rs 1mn will bring in smaller
businesses under the tax ambit. Considering
higher inflation and income levels at the cur-
rent juncture, many uneducated and unin-
formed businessmen will fall in this category.
Government will have to provide education
and extremely simplistic IT infrastructure for the
understanding of this category. Higher thresh-
old in the beginning could be considered and
lower threshold should be brought under tax
net, but not included under GST. This will give
smaller businesses time to prepare.
l One law should be made for GST within which
different taxation rates for CGST, SGST, and
IGST can exist. In line with CST, GST can be
collected by the centre and distributed to
states.
l No additional compensation should be given
to the states as GST will bring in sufficient
gains for the states.
17GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 16
l Administration of CGST and SGST should be
done at one place/office.
l Government should ensure that a purchaser is
able to get credit on the credit issued by the
supplier, irrespective of issues with the supplier
in other taxation contexts.
l Certain services come along with goods; these
should be merged as one.
l At the initial stage of implementation, govern-
ment should administer the inflation burden on
the consumer, as businesses may enjoy much
higher margins and profitability and the entire
burden may be passed on to the consumer. With
time, market forces and competition will find
equilibrium and prices will decline.
Mr. Lakshmikumaran, founder of Lakshmikumaran
& Sridharan (L&S), an Indian law firm specialising
in the areas of international trade, taxation, intel-
lectual property and corporate laws, believes that
industry should be given sufficient time to structure
their systems and accounts for GST — 6-9 months
of preparation time should be given to corporate.
As of now, very little information is available with
the industry participants about GST tax rate, filing
procedures, etc. GST benefits will be compromised
if petrol, alcohol, tobacco, and real estate are kept
outside its purview. Past experience with VAT intro-
duction and implementation has been sour. Interna-
tionally, countries have given two years of time for
implementation.
However, GST should be introduced in any form as
it brings a host of other advantages for the indus-
tries. It can be enhanced with time and experience.
Government’s intention is to introduce it by April
2015. If implemented as intended, states may give a
few months’ temporary exemption to industries from
complying, to ensure adequate preparation.
GST should be introduced faster; DTC can still
wait. GST is the best nutrition for the economy, he
feels. It will be a step away from the existing archaic
laws, will reduce incidence of tax evasion, and tax
litigations will drop. The most important benefit for
industries is from tax set-off along the entire supply
chain.
Consumer will be impacted in the short-term, while
government revenues should remain neutral to
higher. It is advised that the draft legislation should
be put in the public domain for their comments and
at least 6 months should be given for preparation.
Goods and services should be charged at the same
rate. Variation between the CGST and SGST will not
impact the end-consumer.
Pratik Jain, tax partner, KPMG India, expects GST
to be implemented by April 2016. He says GST will
address wide-ranging issues with the current indirect
tax structure. Currently, the tax system drives the
business in many ways and not economic efficiency.
Cascading impact and no credit setting off between
centre and states adds to the cost and inflates pric-
es. Every state has a different law, filing procedures,
and tax rates and incentives, influencing businesses.
This results in multiple touch points with authori-
ties, cumbersome compliances, and state-specific
arbitrage.
GST is internationally recognised in most developed
countries with the only exception of United States.
As per our constitution, dual structure is feasible and
suitable. SGST is designed to go to the consumption
state – this resolves the problem of inter-state restric-
tions being faced in the current structure.
States are worried about losing fiscal autonomy (as
GST council will decide the tax rate, products, etc.)
and insufficient compensation (producing states will
suffer more). More traders will fall under GST. Mr.
Jain believes that the central government may agree
to states’ demand for petroleum and alcohol exclu-
sion from GST (out of demands to exclude petrole-
um goods, alcohol and entry tax).
GST will be a significant reform, but may not be a
perfect one. Exclusion of petroleum goods will mean
that approximately one-third of the economy will be
out of GST. There is no clarity on tax rate yet; howev-
er, expected GST rate is likely to be revenue neutral,
considering the benefit of credit offset and services
under GST.
In the short-term, GST may be inflationary — gain
from offsets on input for the manufacturer is likely
to be passed on to consumers when more clarity
emerges. If it is not implemented in the next 1-2
19GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 18
years, then GST may be delayed, as the government
may not be comfortable introducing GST towards
the end of its regime — history has shown that
governments that have introduced GST have not
returned to power.
A tax expert with a renowned FMCG company
says that GST will streamline the current tax struc-
ture. Impact on the FMCG industry will depend on
the tax rate. As of now, it is believed that GST could
be introduced at a rate of 16-18%. At 18%, there is
no benefit or loss for the company. However, cur-
rently, packaged food is taxed at a lower rate of sub-
5% — under GST this rate will be revised upward to
the introduced GST band (16-18%), which is a big
concern for the industry. This will have an inflationary
impact. Personal care goods could benefit at 16%
GST; at 18% it will breakeven. Distribution and com-
pliance will streamline.
Mr. MS Vasan, a senior tax professional says GST
is still at a nascent stage. With 29 states, 2 union
territories, plus centre — 32 independent countries
within one unified country (in his opinion) to share
VAT revenues — is an uphill task.
l GST will bring tax rate rationalisation for all
goods and services, he feels
l Compensation should be provided for lesser
revenue-earning states, as consumption states
will earn higher revenue — e.g., manufacture in
Gujarat but consumed in Delhi (cars)
l An equilibrium should be created among state
taxes, share of taxes, and compensation for
shortfall
Central GST, state GST and inter-state transfers
will have to be tracked, recorded, and assessed.
GST should be implemented flawlessly without
any baggage of VAT shortfalls and imbalances. Tax
reforms, IT infrastructure and simplified procedure
should go hand in hand for the success of GST. The
government will probably be equipped to handle
this upgraded version of tax reform by 2016.
The expected rate of 16-20% will be better for the
automobile industry vs. the current rate of 24-28%.
Also, currently, there is no input tax credit set-off
benefit for the industry across the supply chain. GST
tax rate is not an issue as long as it remains vatable.
The entire chain of distribution will become more
transparent. VAT suffered with implementation vary-
ing from the white paper recommendations causing
confusion for the taxpayers, thus care should be
taken to ensure that GST implementation is in line
with the recommendations, ensuring transparency.
Consistency and transparency is the key for GST
reform. GST should be levied across the value chain
and there should be minimum exemptions. End
consumer will be burdened if the product is in the
monopolistic segment. If the segment is regulated in
terms of price, customer will not be impacted. Com-
panies will benefit as credit set-off across the chain
will add to margins. GST imposition will cut down
the freebies that are being given (on cars) currently.
A large Maruti dealer says that GST implementation
will be a huge positive for the sector. Currently, the
tax system is fraught with inter-state complications
in taxation methods even if the VAT rate is the same.
The stock distribution of cars is an expensive affair
as warehouses are set on the basis of tax benefit
rather than economic gains. It takes about 6-7-days
for a car delivery from Maruti’s Gurgaon warehouse
to Mumbai (in Maharashtra). With the advent of GST,
the number of days can reduce to a single day as
stockyard/stocks will be located at a few centralised
places. Maruti already has a few regional stockyards
and regional parts distributions centres but would
be able to dramatically increase the number if GST
is implemented. Currently, Maruti’s regional parts
distribution centres can stock up to 30% of the
range of spare parts due to taxation norms. With
GST implementation, it will rise to 80% of the range
of spare parts, thus hastening the supply of spare
parts. As of now, there is no clarity on octroi and
LBT — these two set of taxes add significantly to the
administrative complexities.
Tax rate of GST will not be a concern for the sector
as set-off benefits will be provided for the manufac-
turer and service provider. However, the customer
may be burdened if it is steep. A rise of 1-2% or
slightly more along with the abolition of octroi and
LBT should be acceptable to the consumer. A higher
rate will adversely impact demand, as the burden of
higher tax rate will have to be borne by the consum-
er.
19GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 18
Mr. Dinesh Maheshwari, tax expert at Future
Group, is gung-ho about GST. Currently, the
company has warehouses spread across the coun-
try in order to avoid inter-state transfer taxes. If all
the taxes (like octroi, entry tax, CST) are subsumed
in GST, the company will focus on consolidating
warehouses, which will add to cost efficiency (3-4%
cost reduction expected on this front). Input tax
credit will be available on capex under GST — this
will add to savings of 20% of the capex amount.
Service tax credit will also be available under GST,
adding 7-8% to cost savings. Services form a big
portion of expense for the retail sector in the form of
Q&A with GST expert at Taxsutra
1) Your views on the currently advised GST structure?
GST, which is intended to totally revamp the manner of
indirect taxation, is definitely the most awaited reform.
Though GST is a welcome step (all taxes will become a
pass through), the success of GST lies in its smooth im-
plementation. GST proposes to replace all indirect taxes
being levied on goods and services by the Indian central
and state governments in the form of Central GST and
State GST, respectively. The proposed GST will be a further
improvement over VAT, hence a study of the manner and
shortcomings faced while implementing VAT can be useful.
Considering India’s federal polity, implementation of dual
GST structure is an apt tax reform, which safeguards states’
as well as centre’s revenue (albeit with a temporary loss to
the state exchequers). From a manufacturer’s standpoint,
this will definitely help reduce the cascading effect of
various taxes that are levied throughout the manufacturing
process.
Consensus among stakeholders is the key to implementing
GST. However, the government should ensure that there
are not too many exceptions from the GST framework.
2) We understand that the government is in favour of
introducing dual GST? Its benefits and negatives?
Benefits of GST:
l Simplified tax structure, broadened tax base, reduction
in number of taxes applicable and phasing out of Cen-
tral Sales Tax on interstate transactions
l Will remove cascading effect; hence, it will provide
more relief to industry, trade and agriculture by provid-
rent, housekeeping, legal and professional services,
etc. He does not expect credit benefit to come from
electricity and petroleum products as these are likely
to remain out of GST ambit. Simplistic structure and
lesser warehouses will add to savings.
Consumer will be burdened somewhat as prices
of some of the commodities will rise in the range
of 5-10% (90% of the segments will not record any
price rise), he believes. GST tax rate expectation is
at 17-20%. Corporate and business consumers will
shift to organised sector as credit can be claimed
against the expenses.
ing a more comprehensive and wider coverage of input
tax set-off
l Will reduce compliance cost by providing uniformity in
procedures
l It is a destination-based tax — which is in line with pro-
posed OECD guidelines on VAT/GST for international
trade
l Uniform tax rates across states will ensure that tax
arbitrage is not a guiding factor in the business set-up/
supply chain management
l Will help build a transparent and corruption-free ad-
ministration
l Increase competitiveness of Indian goods and services
in international market and thus, boost exports
Negatives:
l State to lose autonomy over taxation of certain
products (e.g., alcohol) and resultant loss to the state
exchequer
l Administration may be an issue, especially in case of
interstate transactions - tax authorities would require
thorough knowledge of the new law (this is addressable
through training)
l Implementation hassles in view of lack of clarity over
GST legislation would hamper the transition for tax
payers (addressable through coordinated approach in
implementation)
3) What is the GST rate that government may introduce
for state GST and centre GST? What could the cumula-
tive GST rate be? How will these rates compare with
the existing VAT and centre tax structure.
Presently, under the multiple indirect tax laws, excise
21GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 20
ranges from 8.24% to 12.36%; service tax is 12.36%; VAT
ranges anywhere between 4% to 20%; aggregate customs
duty falls between 24% and 28%. These are broad rates
and exact rates would depend upon product and other
factors.
The combined GST rate is expected to be below 20%. The
Empowered Committee has decided to adopt a two-rate
structure – a lower rate for necessary items and items of
basic importance and a standard rate for goods in general.
There will also be a special rate for precious metals and a
list of exempted items.
4) What will be the impact on tax collections for the
centre and states?
Increase in tax base will definitely see a rise in revenue
collection for the centre. For states, there could be a short-
term revenue loss, but over time, the revenue productivity
should increase due to better tax compliance and in-
creased productivity of the economy.
5) What are the issues that states have due to which
they are wary of introducing GST? Do you concur with
their concerns?
Some states are apprehensive about surrendering their
taxation jurisdiction, while some want to be adequately
compensated. To an extent, this seems justified since the
states have not been entirely compensated for revenue
loss arising from reduction in Central Sales Tax since 2010.
At present, states derive about 35-40% of their sales tax
collections from petroleum products and alcohol. Haryana
gets Rs 40-50bn from purchase tax on food grains. They
are likely to lose a major chunk of the revenue if these
products are brought within the scope of GST.
Some Union government officials have insisted on giving
only administrative control to states, whereas states have
unanimously recommended grant of legal powers. This
may create a significant eco-political inter-dependency.
6) What will be the impact on business and sectors?
The current indirect taxation regime does not fully address
the issue of cascading effect of taxes already paid at earlier
stages as there are several other taxes, which both the
central government and the state government levy on pro-
duction, manufacturing, and distribution, where no set-off
is available in the form of input tax credit. These taxes add
to the cost of goods and services through “tax on tax”,
which the final consumer has to bear. Such cascading effect
of taxes will get removed with the introduction of GST with
a continuous chain of set-off from the stage of manufactur-
ing to the retailer’s stage. Thus, the overall cost of goods is
likely to come down under the GST regime. Lower prices
will lead to more consumption, which will have a positive
impact on businesses. Also, the overall compliance cost for
an entity will reduce in GST, which will increase the bottom-
line.
7) Which sectors will be positively influenced and which
will have negative impact?
Currently, almost every sector is marred by multiplicity of
taxes and the cascading effect across the chain. A simpli-
fied tax regime through GST will certainly have a positive
impact on sectors like pharma, auto, logistics, retail and
FMCG. However, liquor and petroleum industries may not
benefit in light of their likely exclusion.
8) Impact on the end-consumer? What will be the
impact on end-prices? Will the burden largely fall on
the end-consumer? Which commodities can see higher
prices?
In the GST system, both central and state taxes will be
collected at the point of sale. This will benefit individuals
as end prices could come down. Lower prices will lead to
more consumption, thereby helping companies.
9) When is the GST likely to be introduced? Howwell
prepared is the corp orate sector for it?
The new government’s election agenda as well as its first
budget speech emphasized GST. However, considering
that substantial work is still left to be completed, it does
not seem feasible to implement GST from April 2015.
While the corporate sector would be eagerly awaiting/
seeking speedy implementation of GST, it is necessary that
GST law and rules first need to be released by the govern-
ment. Thereafter, the government as well as businesses will
require reasonable time to implement GST. It will require
significant support from a good information technology
platform.
10) Which taxes (state or local bodies) will be left out-
side the purview of GST?
Basic customs duty and cess thereon, LBT, octroi, entry tax
in lieu of octroi, stamp duty, VAT on alcoholic beverages
(subject to state discussion) and excise duty on tobacco
21GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 20
could be left outside the purview of GST.
11) Which commodities and services are expected in the
exclusion list?
Alcoholic beverages, petroleum products, and tobacco are
expected to be out of the GST net. If this happens, it may
not be an ideal GST and hence the government should
strive to bring more products into the GST framework.
Deloitte Survey – survey done across industries
and cities
l 70% of the respondent positive about GST, 28%
unsure (possibly due to poor awareness)
l Suitability of dual GST in India – 60% of the re-
spondents feel dual GST system is suitable, 23%
disagree and 17% are unsure.
l Tax rate – 12% rate seems to be most appropri-
ate for the respondents
l GST on petroleum goods – 75% agree, 25%
disagree
l Most of the respondents agree that GST will
eliminate the cascading effect of taxes
l 75% of the respondents agree that tax credit will
be simpler in the GST regime
l Over 60% of the respondents across sectors feel
that business model change will be necessary
l Transition from current tax structure to GST
regime should be given around 9-12months
l Respondents from manufacturing and services
are unsure about GST impact on cost and price
of product. Trading sector participants believe
that cost will fall.
l Training current staff and appointing professional
advisors seems to be the approach
CII-KPMG Survey
l 88% of the respondents prefer a single GST
enactment (both for centre and states)
l 77% of the respondent would prefer to have one
single rate for CGST and SGST
l 86% of the respondent would prefer to have a
cumulative standard rate between 14-16%
l 61% of the respondent prefer that exempted
services be notified instead of taxable service
like the norm internationally
l 45% of the respondents believe that their busi-
ness will be impacted due to taxation of stock
transfers
l 44% of the businesses may consider consoli-
dating their business operations
l 55% of the respondents have not analysed the
price impact of GST on goods and services
l 84% of the respondents feel that input tax
credit benefit will have a positive impact on
their profitability
l 46% of the respondents feel that higher work-
ing capital will get blocked under GST (due to
GST on import and stock transfers)
l 95% of the respondents feel that mechanism
to transfer credit from one state to another
should be inbuilt in GST
l 78% of the respondents feel that their busi-
ness will be impacted due to rise in tax rate on
services
l 66% of the respondents feel that cash refund
would be an adequate substitute for tax bene-
fits
l 40% of the respondents feel that IT/system
changes will be a big challenge (it may take 4
months to reconfigure IT systems.
12) Any thoughts on the treatment of petroleum prod-
ucts, tobacco products, and alcohol? If included, how
will the retail prices be impacted? Or will the larger
impact be felt on state revenue loss?
These products could be brought under the GST tax net,
with power given to states to charge additional excise
duties over and above the standard SGST.
Survey Indicators
23GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 22
Impact on sectors largely positive
G S T S E C T O R A L I M PA C T
Manufacturing sector
Imposition of GST will reduce the tax burden on
the manufacturer as taxes will be paid on value
addition for both goods and services. Elimina-
tion of multiple tax structure will reduce cost,
enhance margins, add to profitability, and make
manufacturers globally competitive. The resultant
tax rate is expected to decline to 14-16% under
GST vis-à-vis the current tax rate of 20%. At the
same time, shift from one tax regime to another is
generally fraught with several challenges in terms
of infrastructure, administrative capabilities, and
business impact.
Pharmaceutical sector
Indian pharma sector is fraught with multiple tax-
ation (customs duty, excise duty, CST/VAT, service
tax, entry tax, octroi, cess). GST will lower trans-
action and compliance cost for the industry. Tax
credit benefits will reduce the cost of the goods
— this will enable Indian pharma companies, to
become more competitive globally (pharmaceu-
ticals are one of the key contributors to Indian
exports). Relocation and reduction of warehouses
will reduce the cost for the company and simplify
inter-state transactions. Location-based incentives
(like tax holiday in Himachal Pradesh and Uttara-
khand) may continue in the form of reimbursement
to ensure continuity of GST at every stage.
Currently, drugs and medicines fall under the
4-5% excise duty category and this is expected to
continue at the same rate under GST, while APIs
are taxed at 8%. Companies are unable to set-off
taxes due to tax differential between the input
and finished goods. GST tax rate is expected to
be higher than current API tax rate (if aligned with
GST, consumers could be burdened), tax set-off
benefit across the supply chain will be a significant
benefit for the industry.
23GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 22
Automobile sector
GST benefit will come in the form of simplistic
tax structure and inter-state stock movement. For
the automobile industry, 80% of the stock is sold
outside the manufacturing state through distributors
and stock transfers. CST is charged on the goods
movement (which increases the price of the good)
and CST cannot be set-off against VAT. This will lead
to consolidation of OEM plants and warehouses.
Negative will be in the form of stock transfers com-
ing under GST (which is currently tax-free or taxed
minimally by some states), however companies will
be able to set it off against other tax liabilities. GST
rate of around 16-18% will be good for the sector as
the current tax rate is higher, especially for big cars.
Logistics sector
The introduction of GST will bring huge opportu-
nities for this sector. Manufacturers will relocate
warehouses based on economic efficiencies and will
not need to have state-wise warehouses to adhere
to each state’s tax code. Currently, a company builds
warehouses across states (25-40 small warehouses
depending on regions and scale of operations) in-
stead of 6-8 large warehouses to cover entire India.
With GST coming in, consolidation of warehouses
will take place and there will be a focus on good
quality technology to increase the efficiencies. This
function could be outsourced to logistic service
providers, as they are well placed and prepared to
manage the distribution and supply chain.
Housing and construction industry
The Kelkar committee has recommended inclusion
of housing and construction in GST, considering its
contribution to GDP. Bringing this sector brought
under GST (stamp duty will be subsumed with GST)
will bring in transparency in this largely unorganised
and uncontrolled sector. All the newly constructed
residential as well as commercial segments will fall
under GST. Experts believe that the overall impact of
this measure on property prices would be marginal.
Others believe that different land laws across states
(even if tax rates are streamlined after GST) will keep
the structure complicated. However, government
officials have said that the burden on tax payers will
go down by as much as 25-30% after the introduc-
tion of GST.
FMCG Sector
For FMCG goods, excise duty rate varies from 4%
to 10%, and VAT from 4% to 15%, depending on
the product. Tax incidence on Indian FMCG sector
is supposedly the highest in the world along with
the complex tax structure. Warehouses and depots
are based on tax benefit (like for most other sectors)
and distribution cost is at 2-7% of turnover. Con-
solidation of warehouses should positively impact
FMCG margins (experts say 4-5% impact). Currently,
Distribution cost/sales of FMCG
Stage of supply chain
Purchase value of Input
Value addition Value at next stage
Rate of GST GST on output Input Tax credit Net GST= GST on output - In-
put tax credit
Manufacturer 100 30 130 10% 13 10 13-10 = 3
Whole seller 130 20 150 10% 15 13 15-13 = 2
Retailer 150 10 160 10% 16 15 16-15 = 1
GST Tax Impact Matrix
25GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 24
A) Goods-Producer to Whole-Seller Under VAT (Rs.) Under GST (Rs.)
Cost of Production 100,000 100,000
Add: Producersmarginofprofit 20,000 20,000
Producers basic price 120,000 120,000
Add: CentralExciseduty@8% 8000 NIL
Add: ServiceTax@10%onTransportation&Jobworkpaid 4000 NIL (Included in GST)
Add: [email protected]% 16500 NIL
Add: CentralGST@12% NIL 14,400
Add: StateGST@8% NIL 9,600
Total Price 148,500 144,000
(B) Goods –Whole-Seller to Retailer Under VAT (Rs.) Under GST (Rs.)
Cost of goods to the Whole-seller 132,000 120,000
Add:Profitmargin@10% 13,200 12,000
Total 145,200 132,000
Add: [email protected]% 1,650 NIL
Add: Central GST @ 12% NIL 1,440
Add: StateGST@8% NIL 960
(C) Goods-Retailer to Final Consumer
Cost of goods to the Retailer 145,200 132,000
Add:Profitmargin@20% 29,040 26,400
Total 174,240 158,400
Add: [email protected]% 3,630 NIL
Add: Central GST @ 12% NIL 3,120
Add: StateGST@8% NIL 2,112
Total Price to the final Consumer 177,870 163,632
Tax component in price to Final Consumer 21,780 31,632
Final Price ex-taxes 156,090 132,000
GST vs. VAT - Impact on consumer
The table below show that although tax burden on the consumer rises, the basic cost of the product (goods and services) falls, leading to a gain of approximately 8% for consumer.
Consumer
GST will be levied at the point of manufacturing, sale, and
consumption of goods and services at the central and state
level. Taxes will be paid on value addition; thus, manufac-
turers will be able to set off the taxes paid on purchase of
goods and services against the taxes payable on supply of
goods and services. Technically, manufacturers will benefit
while the entire burden will fall on the end-consumer. How-
ever, it is believed that GST will not be an additional burden
packaged foods are taxed at 4-5% rate,
if brought under GST (as talks are ripe
that exemption and low tax commodity
list will be pruned under GST), consum-
er may be burdened while companies
will remain neutral due to tax set-off
benefit.
Small and medium enterprises
The Empowered Committee has rec-
ommended (and states have agreed)
a threshold limit of Rs 1mn as annual
turnover for goods and services, below
which GST will not be levied. The
threshold limit should be same across
all the sectors and union territories.
Current exemption under VAT stands
at Rs 0.5mn for most states; it is lower
for north-eastern and special-catego-
ry states. The threshold under Centre
GST for goods is recommended at Rs
15mn and a similarly higher threshold
is recommended for services. Higher
threshold limits under GST vs. VAT will
bode well for SMEs.
As per a NCAER study (it is India’s old-
est and largest independent, non-profit,
economic policy research institute), GST
reform would benefit the small-scale
and other manufacturing units in unreg-
istered sectors relatively more than the
corresponding registered sectors — it
will do so by making capital cheaper
than before because GST will provide
the benefits of full tax offsets. on the consumer. Manufacturers of goods and services will
be able to save by shifting to GST as they will pay taxes on
value addition vs. total value of purchase. This benefit is ex-
pected to be passed on to the consumer. Tax rate is expect-
ed to decline to 14-16% vs. the current tax rate of 20%. This
should result in a positive impact on consumption demand
and inflation. Depending on the rate agreed on CGST and
SGST, a one-time inflationary reaction is possible as and
when GST is implemented. After that, it should be neutral
for inflation. As per the 13th finance Commission, inflation
should fall if GST rate is implemented at 12%.
25GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 24
Positive for the economy and for employment; short-term negative for inflation
G S T M A C R O I M PA C T
It is widely believed that implementation of GST
will have considerable impact on various econom-
ic parameters, businesses, and consumers. It is
expected to boost corporate profitability, margins,
and exports and greater compliance and broader
tax base should contribute to added economic
growth (NCAER estimate is 1.0-1.7%). GST im-
plementation will link domestic taxation norms to
international standards.
Exports: As per the current norms, central indirect
taxes (excise + customs) can be set-off while state
taxes (like central sales tax, electricity duty, sales
tax on petroleum products, mandi tax, entry taxes,
octroi, and municipal taxes) are not available for
set-off – thus, manufacturer tend to lose as much.
Cumulative impact of such un-rebated taxes is
between 3-12% of the fob export (depending on
the product and its state of origin). Under GST,
most of state taxes (along with central taxes) will
be reimbursed to the manufacturer and service
provider. Under this regime, exports are expected
to become tax-free, thereby enhancing the com-
petitiveness of Indian exporters.
Imports: Currently, imported goods are charged
a customs duty (12%), landing charges (1% CIF),
CVD (0-12%), education cess (3%), and addition-
al CVD (4%). Under GST, all these duties will be
subsumed, and SGST and CGST will have to be
paid on imported goods and services. Tax benefit
will go to the state where goods are supplied/
consumed. Since input tax credit will be available
on the taxes paid, it will be revenue neutral for
importers.
Fiscal deficit: GST should have a positive impact
on fiscal deficit as the government has decided on
introducing a revenue-neutral tax. Reduction in tax
evasion will have a positive fiscal impact. Higher
GDP, boosted by GST implementation, should
also stimulate fiscal consolidation. Initially, budget
outgo from centre to state will increase in order to
duly compensate the states for revenue loss. Once
the compensation period ends, fiscal consolidation
can be substantial as the centre will not have to
share taxes with states, which is the norm currently
(28% of the gross tax revenue). Revenue neutral
rate recommended for states is 6%; however, it is
being advised that states’ GST should be kept at
7% to ensure revenue gains.
Inflation: It is widely accepted and believed by
manufacturers and service providers that the entire
burden of GST will be passed on to the consumer
(in the advent of higher GST rate than the current
norm) and businesses will enjoy higher margins.
Thus, in a scenario of higher GST, inflation can inch
higher. However, with the passage of time, busi-
nesses may decide to pass on some of the benefit
to end-consumer. Competitive forces should also
help in correcting prices.
The current service tax rate is at 12%. If GST is
introduced around the current level, inflationary
impact will be nil — if it is higher, it will burden
the consumer. Another aspect is that service tax
coverage will be extended to all services (except
a negative list) – this will impact consumers. On
goods, total tax (central excise duty and State
VAT) comes out to be 25.5% currently. With the
introduction of GST, this should decline substan-
tially, thus bringing substantial benefits to consum-
ers. The overall inflationary impact of GST will be
based on the rate.
27GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 26
GDP gain 1-1.7% every year
Real Returns
Land 0.4-0.8%
Wage 0.7-1.3%
Capital 0.4-0.7%
Revenue Neutral GST rate 6.2-9.4%
Manufacturing
Output to rise Textiles, readymade garments, minerals other than coal, petroleum, gas, iron-ore, organic heavy chemicals, industrial machinery for food and textiles, beverages, and miscellane-ous manufacturing.
Output to decline Natural gas, crude petroleum, iron ore, coal tar products, and non-ferrous metal indus-tries.
Exports gain 3.2-6.3%
Exports to rise Textiles and readymade garments, beverages, industrial machinery for food and textiles, transport equipment other than railway equipment, electrical and electronic machinery, and chemical products.
Moderate gainers Agricultural machinery, metal products, and railway transport equipment
Exports to fall Agricultural sector, iron and steel, wood and wood products except furniture, and cement
Imports gain 2.4-4.7%
Imports to rise Leatherandleatherproducts,furnitureandfixtures,agriculturalsectors,coalandlignite,agricultural machinery, industrial machinery, other machinery, iron and steel, railway transport equipment, printing and publishing, and tobacco products
Moderate gainers Metal products, non-ferrous metals, and transport equipment other than railways
Imports to decline Textiles and readymade garments, minerals other than coal, crude petroleum, gas and iron ore, and beverages.
Inflation
Agricultureinflationtorise 0.6-1.2%
Manufacturinginflationtodecline 1.2-2.5%
NCAER Study
Empirical evidence of GST impact on inflation
and GDP in other countries is mixed. Studies
have shown that inflation inched higher after the
introduction of GST in Australia, Canada, and New
Zealand. However, GST or higher inflation did
not result in a wage-price spiral. In Canada, CPI
increased by 1.5% and GDP dropped by 1.2%.
Higher inflationary pressures resulted in higher
interest rates, thus creating an additional impact
on GDP. These countries have continued to bring
in changes to their initial GST structure, based on
economic response and impact. Other research
work has shown that adverse impact on macro
data was primarily due to lack of complete GST
implementation. It should be applied to all the
goods and services across the board.
27GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 26
Well-established globally, a step forward to meet international standards
G L O B A L G S T S T R U C T U R E
About 150 countries have adopted a GST or national-level
value-added tax framework, with GST rates varying from
5% to 27%. Studies have shown that higher indirect taxes
and lower direct taxes have limited impact on economic
growth and promote businesses. In the wake of the financial
crisis, developed countries raised GST/VAT rates to propel
economic growth. Average VAT rate in European Union has
increased to 21.4% in 2014 compared to 19.4% in 2008.
New entrants to join GST: Bahamas and Malaysia are
likely to implement GST/VAT in 2015. China has successfully
implemented a VAT pilot that replaces its much narrower
‘business tax’. Other countries such as the Gulf Cooperation
Council states are actively considering introduction of VAT/
GST system.
Actual revenue falls short of planned: Global evidence
suggests (OECD, 2009) that GST revenue earned has mostly
fallen short by 40-50% vs. the revenue stream planned. How-
ever, it is unclear if the shortfall is due to tax exemption, tax
avoidance, or difficulty in tax collection. At the same time,
evidence is sufficient that efficient and effective design of
GST plays an important role in implementation and revenue
collection. For example, New Zealand uses a broad base
with few exemptions, which could explain the good VAT
revenue ratio. At the other end of the scale, Mexico employs
zero or reduced rates on a wide range of supplies.
Legislative changes continue: EY carried out a global
survey (Nov 13) on frequency of VAT/GST changes, cover-
ing 96 countries. It showed that in more than 50% of the
participating countries, the primary indirect tax legislation
changes at least once a year, and in more than 20 countries,
major changes take place more frequently than once a year.
The reasons for continuous legislative changes are — to add
efficiency to tax structure, to address fraud, technological
upgradation, and due to the influence of multi-territory indi-
rect tax systems. Legislative changes add to the problem of
understanding the change and implementing the change for
the businesses.
Study by OECD
VAT has been adopted in more than 150 countries across
the world due to factors like globalisation, systemic neutral-
ity of tax towards international trade, and its efficiency in
raising revenues. It accounts for one-fifth of the tax revenue
of the OECD nations. VAT systems are largely made on the
same core VAT principles. However, variation is seen across
countries in the way it is implemented – wide range of rate,
exemptions, and special arrangements that are designed for
non-tax policy objectives.
VAT rates: Global VAT rates remained stable between 1996
and 2008. However, they have risen since then in order to
ensure fiscal consolidation. At the same time, tax rates on
essentials – medical, hospital care, food, and water supplies -
have been reduced.
Standard rates of VAT
29GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 28
Exemptions: Although exemptions are a departure from the
basic rule of VAT, all OECD countries (except New Zealand
and Turkey), exempt socially-oriented sectors like health,
education, and charities. In addition, most countries also
use exemptions for practical reasons (financial and insur-
ance services due to the difficulty of assessing tax base) and
for historical reasons (postal services, letting of immovable
property, supply of land and buildings). Exemptions result in
movement away from neutrality and may result in a cascad-
ing effect, which will depend on the stage of supply chain
at which exemption is allowed; just prior to final sale will not
result in cascading impact and the consequence will be only
loss of revenue from the last stage of value addition. Exemp-
tion of financial services creates huge distortion with respect
to both consumer and business decisions.
Thresholds: There is no consensus on thresholds across
OECD countries. The main reason for excluding small busi-
nesses is the disproportionate cost involved versus revenues
generated in tax administration. Similarly, VAT compliance
cost for small businesses is disproportionate.
Restrictions on right to deduct VAT: According to VAT prin-
ciples, right to deduct input taxes should be limited to the
extent that those inputs are used for the taxable purposes
of businesses. The right of deduction is legitimately denied
where inputs are used to make onward transactions that fall
outside the scope of the tax such as tax exemptions. This
is also the case for input tax relating to purchases that are
not wholly used for furtherance of taxable business activity,
for example, when they are used for the private needs of
the business owner or its employees. Most OECD countries
have legislation in place that provides for blocking input tax
deduction on a number of goods and services because of
their nature rather than because of their use by business-
es, generally with a view to ensure (input) taxation of their
deemed final consumption (e.g., restaurant meals, reception
costs, hotel accommodation, use of cars by the employees of
businesses, etc.)
Measuring performance – VAT revenue ratio (VRR): VAT
revenue ratio is defined as actual tax collected vs. the reve-
nue that would theoretically be raised if VAT was applied at
the standard rate to all final consumption. The ideal rate for
revenue ratio is 1. Low VRR indicates a reduction in tax base
due to a large number of exemptions or reduced rates or a
failure to collect all due taxes. New Zealand and Luxembourg
have a VRR of 0.98 and 0.93, respectively. Most countries
Category-wise tax revenue as a % of total tax (%)
EU VAT / GST rates (%)
VAT as a % of EU GDP and Tax revenue (%)
29GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 28
(26 of 33) have a VRR below 0.65 and about half (14 of 33)
have a ratio below 0.50 with an OECD average of 0.55. This
suggests that about one half of potential VAT revenue is not
collected. Weak VRR suggests that most OECD countries
apply VAT only on a narrow tax base giving a wide range of
exemptions. It also reflects the lower rates that exist in most
member countries.
VAT and GST system in federal countries with dual rate
structure: GST system is appropriate in countries where
centre and state enjoys tax authority as it prevents cascading
effect between overlapping taxes and states’ tax competi-
tion. In this section, we have looked at countries like Canada
and Brazil which also work under dual GST structure.
Canada’s experience has shown that it is possible to suc-
cessfully implement dual GST in a federal state. In Canada,
both federal and provincial governments have the power to
levy consumption and sales taxes. New harmonised sales
tax includes federal GST and provincial sales tax and applies
normally to the same base. HST is normally levied at 13% and
includes a 5% federal tax.
Brazil on the other hand reflects the ‘not one size fits all’
approach. Brazil follows a tax model where tax powers
are shared at various levels of government with no federal
harmonisation of the tax base as this would grant too much
control to the federal government. Union, states, and federal
districts have the power to legislate on tax, but the scope of
the power varies.
Conclusion
GST should be implemented as soon as possible, even with
exemptions in the beginning. With time, changes can be
brought in the GST structure. GST is going to be a significant
indirect tax reform for India, benefiting companies and the
government immensely. Companies will benefit from tax sim-
plification and elimination of cascading effect for goods and
services. Both central and state governments will benefit from
revenue increment due to wider base, minimum leakage, and
higher compliance. GST aims at taxing consumption — there-
fore, the consumer may be burdened initially. However, com-
petitive forces should eventually bring price stability. Compa-
nies will not be impacted if GST tax rate is set on the higher
side due to credit benefit facility under GST at every stage.
Consumer demand may suffer in case of higher tax rate.
At the current juncture, the basic GST framework exists with
limited information on specific details for the industry. At the
VAT Revenue Ratio
time of implementation, sufficient time should be provided
to the industry to upgrade their systems. Government should
provide a simple IT platform that small businessmen can
understand, for them to comply with GST easily.
Global experience shows that more exemptions defeat the
advantages of GST and result in a cascading effect and lower
tax revenue. Exemptions should be limited to necessary com-
modities and services. In India, petroleum and alcohol are
being contemplated for exclusion. This will certainly have an
adverse impact for companies and central government. GST
introduction is keenly awaited by ALL!
31GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 30
Atanu Bagchi, CFO CanFin Homes Ltd
We met up with Mr. Atanu Bagchi, Chief Financial Officer of Canfin Homes in May 2014 to understand the turnaround in Canfin Homes and the business strategies of its management. Mr. Bagchi has vast experience in mortgage business and in its 20years association with Canfin Homes; he was posted in various branches across India. Supe-rior product offering; prudent lending practices and efficient customer service has provided the thrust to the business momentum of Canfin Homes. Excerpts of our interaction with Mr. Bagchi
Gaining Momentum
BY MANISH AGARWALLA
Canfin Homes was incorporated way back in
1987, even before LIC HF came into existence;
still Canfin Homes’ asset size is just 6% of LIC
HF’s asset size. Why?
The low growth was due to a couple of reasons
— Canfin Homes has always been conservative
in its approach in terms of new business. That
has in a way restricted our disbursement growth.
Management is deputed from Canara bank and
until current management; the tenor of previous
management was shorter and Canfin Homes did
not spread its wings in terms of reach. With the
change in industry dynamics — from a seller’s
market to buyer’s market — Canfin took time to
change its approach towards sourcing business.
What has changed now, because in last 2 years,
the disbursement growth has been very ag-
gressive and asset size has increased at a CAGR
of 47%? Is the momentum likely to continue?
The focus and direction of the current manage-
ment has played a pivotal role in the transfor-
mation. Canfin has also added branches — from
52 in FY12 to 83 in FY14. It also started new
delivery channels such as appointing direct selling
agents to push sales. We have also implemented
a core-banking solution for faster, efficient, and
real-time transmission of MIS.
Our workforce has increased from 252 in FY12
to 367 in FY14. With the addition of branches,
delivery channel, and new workforce, today our
turnaround time for individual mortgage loans has
come down to 7-10 days compared to a month for
comparative public sector banks. New product of-
ferings, added distribution network, and improved
efficiency will continue to provide the momentum
to the business.
What are the products Canfin Homes offers
today? What is the customer profile and where
are you dominant (geographically)?
We offer an entire suite of mortgage products
31GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 30
starting from plain-vanilla loans for home purchase
home construction loans, loans for home exten-
sion/repairs/ renovation/up gradation to Loan
against property. We give non-home loan prod-
ucts such as builder’s loans, loans on commercial
property, loans on rent receivable, personal loans
(top-up loans) etc. Home-loan portfolio constitutes
92% of our loan book while non-home loan is the
balance. Average loan ticket size is Rs 1.6mn and
88% of the housing loan portfolio is towards sala-
ried class. Southern region comprises 73% of our
loan book size.
What is the loan processing structure? How do
you ensure that asset quality is maintained?
The process of loan approvals in the company is
fairly decentralized with power to sanction the
loans delegated at various levels in the manage-
ment hierarchy. The power to sanction loans is well
defined in the credit policy for various designa-
tions and for various products. Approval of pro-
posals, which fall beyond certain limits (those that
need the attention and decision making at higher
levels) are referred to and sanctioned by a higher
authority or management committee / the board
of directors.
Given the business size, the Canfin Homes does
not work on vertical platform. The sanctions at
branches are done once the applicant fulfils all
criteria mentioned in our predetermined credit
policy. Any deviation has to be vetted by higher
authorities at the head office. All the loan servicing
can be tracked on a real-time basis. Auto alerts are
sent to concerned branches and the head office
for overdue loans. Follow-up process is initiated till
the accounts are normalized.
What are the yields and spreads in the overall
portfolio (home and non-home)? How is the
loan mix likely to behave?
The overall yield and spread is 11.3% and 1.7%
respectively. Within this, the yield and spread in
home loan portfolio stands at 10.95% and 1.35%
respectively and in case of non-home loan portfo-
lio, the same stands at 14% and 4.4% respectively.
Focus continues to remain on individual home
loans and a balance will be maintained between
home and non-home so as to maintain a decent
spread and return ratio.
What is the funding mix and how is the mix
expected to move going forward?
Our major source of funding comes from bank
loans (52%); refinance from NHB (41%); depos-
its from public (3%); and debentures (4%). Bank
loans are availed at a base rate ranging from
10.0-10.25%; average cost of refinance from NHB
works out to be 9.6% and debentures are at 9.6%.
The proportion of NCDs is expected to increase
further.
The asset quality has been remarkable till date
— is the GNPA and NNPA levels sustainable?
The GNPA stands at 0.2% against the industry
average of 0.7% and NNPA stands at 0%. The low
level of GNPA is on account of Canfin Homes’ pru-
dent loan-appraisal policies and timely follow-up
at the beginning of overdue period. The decline in
percent terms is due to higher loan book growth
in previous few years, even in absolute terms
the GNPA declined from Rs157mn in FY13 to
Rs121mn in FY14 due to constant effort of recov-
ery through Sarfaesi act, personal persuasion and
OTS. Sustainability of such low level is practically
difficult. However the endeavor would be to main-
tain GNPA & NNPA much below industry level.
33GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 32
Indian Economy – Trend Indicators
Monthly Economic Indicators
Quarterly Economic Indicators
Growth Rates (%) Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14
IIP -1.8 2.6 0.4 2.7 -1.2 -1.3 0.1 1.1 -1.8 -0.5 3.4 5.0 3.4 1.9
PMI 50.3 50.1 48.5 49.6 49.6 51.3 50.7 51.4 52.5 51.3 51.3 51.4 51.5 52.2
Core sector 1.2 5.3 3.7 8.0 -0.6 1.7 2.1 1.6 4.5 2.5 4.2 2.3 7.3 2.7
WPI 5.2 5.9 7.0 7.0 7.2 7.5 6.4 5.1 5.0 6.0 5.5 6.2 5.4 5.2
CPI 9.9 9.6 9.5 9.8 10.2 11.2 9.9 8.8 8.0 8.3 8.6 8.3 7.5 8.0
Money Supply 12.8 12.5 12.2 12.5 13.0 14.5 14.9 14.5 14.5 13.5 13.9 13.2 12.2 12.7
Deposit 13.8 13.5 13.1 14.1 14.4 16.1 15.8 15.7 15.9 14.6 15.1 13.8 12.2 12.7
Credit 13.7 14.9 17.1 17.8 16.6 15.5 14.5 14.7 14.4 14.3 14.1 12.8 13.1 13.1
Exports -3.6 11.6 13.0 11.2 13.5 5.9 3.5 3.8 -3.7 -3.2 5.3 12.4 10.2 7.3
Imports -2.4 -5.6 -0.7 -18.1 -14.5 -16.4 -15.2 -18.1 -17.1 -2.1 -15.0 -11.4 8.3 4.3
Tradedeficit(USD Bn) -11.3 -12.5 -10.9 -6.8 -10.6 -9.2 -10.1 -9.9 -8.1 -10.5 -10.1 -11.2 -11.8 -12.2
Net FDI (USD Bn) 1.8 1.7 1.7 3.3 1.8 2.4 1.9 0.4 -0.1 2.1 2.0 4.8 2.4 -
FII (USD Bn) -8.7 -4.7 -2.0 0.2 -0.4 0.0 2.9 2.6 1.5 5.4 -0.1 7.7 4.8 -
ECB (USD Bn) 2.0 3.7 2.3 3.3 1.9 2.2 4.6 1.8 4.3 3.6 3.2 1.5 1.9 -
NRI Deposits (USD Bn) 2.6 1.3 1.1 5.9 4.5 14.6 2.0 0.7 0.7 2.5 1.4 1.1 0.0 -
Dollar-Rupee 58.4 60.6 63.0 63.8 61.6 62.6 61.9 62.1 62.2 61.0 60.4 59.3 60.2 60.1
FOREX Reserves (USD Bn) 284.6 280.2 275.5 276.3 283.0 291.3 295.7 292.2 294.4 303.7 309.9 312.4 315.8 320.6
Balance of Payment (USD Bn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15Exports 75.0 72.6 74.2 84.8 73.9 81.2 79.8 83.7 81.7Imports 118.9 120.4 132.6 130.4 124.4 114.5 112.9 114.3 116.4Tradedeficit (43.8) (47.8) (58.4) (45.6) (50.5) (33.3) (33.2) (30.7) (34.6)Net Invisibles 26.8 26.7 26.6 27.5 28.7 28.1 29.1 29.3 26.8CAD (17.1) (21.1) (31.8) (18.2) (21.8) (5.2) (4.1) (1.3) (7.9)CAD (% of GDP) 4.0 5.1 6.5 3.5 4.9 1.2 0.8 0.3 1.7Capital Account 16.5 20.7 31.5 20.5 20.6 (4.8) 23.8 9.2 19.8BoP 0.5 (0.2) 0.8 2.7 (0.3) (10.4) 19.1 7.1 11.2
GDP and its Components (YoY, %) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15Agriculture & allied activities 1.8 1.8 0.8 1.6 4.0 5.0 3.7 6.3 3.8 Industry (0.6) 0.1 2.0 2.0 (0.9) 1.8 (0.9) (0.5) 4.0 Mining & Quarrying (1.1) (0.1) (2.0) (4.8) (3.9) - (1.2) (0.4) 2.1 Manufacturing (1.1) (0.0) 2.5 3.0 (1.2) 1.3 (1.5) (1.4) 3.5 Electricity, Gas & Water Supply 4.2 1.3 2.6 0.9 3.8 7.8 5.0 7.2 10.2 Services 6.7 6.5 6.1 5.8 6.5 6.1 6.4 5.8 6.6 Construction 2.8 (1.9) 1.0 2.4 1.1 4.4 0.6 0.7 4.8 Trade, Hotel, Transport and Communications 4.0 5.6 5.9 4.8 1.6 3.6 2.9 3.9 2.8 Finance, Insurance, Real Estate & Business Services 11.7 10.6 10.2 11.2 12.9 12.1 14.1 12.4 10.4 Community, Social & Personal Services 7.6 7.4 4.0 2.8 10.6 3.6 5.7 3.3 9.1 GDP at FC 4.5 4.6 4.4 4.4 4.7 5.2 4.6 4.6 5.7
33GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 32
Annual Economic Indicators and Forecasts Indicators Units FY6 FY7 FY8 FY9 FY10 FY11 FY12 FY13 FY14E FY15E
Real GDP growth % 9.5 9.6 9.3 6.7 8.6 8.9 6.7 4.5 4.7 5.7
Agriculture % 5.1 4.2 5.8 0.1 0.8 8.6 5 1.4 4.7 1.5
Industry % 8.5 12.9 9.2 4.1 10.2 8.3 6.7 0.9 (0.1) 4.2
Services % 11.1 10.1 10.3 9.4 10 9.2 7.1 6.2 6.0 6.9
Real GDP Rs Bn 32,531 35,644 38,966 41,587 45,161 49,185 52,475 54,821 57,418 60,691
Real GDP US$ Bn 733 787 967 908 953 1,079 1,096 1,008 950 1,012
Nominal GDP Rs Bn 36,925 42,937 49,864 56,301 64,778 77,841 90,097 101,133 113,551 127,643
Nominal GDP US$ Bn 832 948 1,237 1,229 1,367 1,707 1,881 1,859 1,878 2,127
Population Mn 1,106 1,122 1,138 1,154 1,170 1,186 1,202 1,219 1,236 1,254
Per Capita Income US$ 753 845 1,087 1,065 1,168 1,439 1,565 1,525 1,519 1,697
WPI (Average) % 4.5 6.6 4.7 8.1 3.8 9.6 8.7 7.4 6.0 5-5.5
CPI (Average) % 4.2 6.8 6.4 9 12.4 10.4 8.3 10.2 9.5 7.5-8
Money Supply % 15.5 20 22.1 20.5 19.2 16.2 15.8 13.6 13.5 14.0
CRR % 5 6 7.5 5 5.75 6 4.75 4.0 4.0 4.0
Repo rate % 6.5 7.5 7.75 5 5 6.75 8.5 7.5 8.0 8.0
Reverse repo rate % 5.5 6 6 3.5 3.5 5.75 7.5 6.5 7.0 7.0
Bank Deposit growth % 24 23.8 22.4 19.9 17.2 15.9 13.5 14.4 14.6 15.0
Bank Credit growth % 37 28.1 22.3 17.5 16.9 21.5 17.0 15.0 14.3 16.0
CentreFiscalDeficit Rs Bn 1,464 1,426 1,437 3,370 4,140 3,736 5,160 5,209 5,245 5,312
CentreFiscalDeficit % of GDP 4 3.3 2.9 6 6.4 4.8 5.7 5.2 4.6 4.1
Gross Central Govt Borrowings Rs Bn 1,310 1,460 1,681 2,730 4,510 4,370 5,098 5,580 5,639 5,970
Net Central Govt Borrowings Rs Bn 954 1,104 1,318 2,336 3,984 3,254 4,362 4,674 4,689 4,573
StateFiscalDeficit % of GDP 2.4 1.8 1.5 2.4 2.9 2.1 2.3 2.2 2.5 2.5
ConsolidtedFiscalDeficit % of GDP 6.4 5.1 4.4 8.4 9.3 6.9 8.1 7.4 7.1 6.6
Exports US$ Bn 105.2 128.9 166.2 189.0 182.4 251.1 309.8 306.6 318.6 328.2
YoY Growth % 23.4 22.6 28.9 13.7 -3.5 37.6 23.4 -1.0 3.9 3.0
Imports US$ Bn 157.1 190.7 257.6 308.5 300.6 381.1 499.5 502.2 466.2 500.2
YoY Growth % 32.1 21.4 35.1 19.7 -2.5 26.7 31.1 0.5 -7.2 7.3
Trade Balance US$ Bn -51.9 -61.8 -91.5 -119.5 -118.2 -129.9 -189.8 -195.6 -147.6 -172.0
Net Invisibles US$ Bn 42.0 52.2 75.7 91.6 80.0 84.6 111.6 107.5 115.2 118.1
CurrentAccountDeficit US$ Bn -9.9 -9.6 -15.7 -27.9 -38.2 -45.3 -78.2 -88.2 -32.4 -54.0
CAD (% of GDP) % -1.2 -1.0 -1.3 -2.3 -2.8 -2.6 -4.2 -4.7 -1.7 -2.5
Capital Account Balance US$ Bn 25.5 45.2 106.6 7.8 51.6 62.0 67.8 89.3 48.8 63.5
Dollar-Rupee (Average) 44.4 45.3 40.3 45.8 47.4 45.6 47.9 54.4 60.5 60.0
Source: RBI, CSO, CGA, Ministry of Agriculture, Ministry of commerce, Bloomberg, PhillipCapital India Research
35GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 34
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2
35GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 34
Phill
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37GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 36
CMP
Mkt
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39GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 38
39GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 38
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