GST: Ushering in a new era– Detailed Report

GST | Ushering in a new era - Sparkles and shimmers

GST

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Motilal Oswal

values your

Ushering in a new era

Sparkles and shimmers



India’s biggest tax reform is at the cusp of its legislative birth. We believe

implementation of the Goods and Services Tax (GST) would be a boon for India Inc. as

a whole, since it (a) would simplify and rationalize taxes, (b) shift trade from the

unorganized to the organized segment and (c) improve efficiency in the system.



This is likely to benefit sectors like FMCG (ex-cigarette & jewelry), auto, cement, light

electrical, multiplexes, retail and logistics. However, commercial vehicles, print media,

cigarette and jewelry companies would be adversely impacted, in our view.



On the macro front, we expect GST to have a neutral impact on government revenues

initially (but should be accretive over time), while the reported CPI is likely to remain

stable. However, consumers may feel the pinch due to rising taxation on services.

GST: India’s biggest tax reform



The indirect tax regime in India is set for a complete overhaul. We believe GST

would simplify and rationalize taxes, shift trade from the unorganized to the

organized segment and improve efficiency in the system.

The real value of GST would be in the area of tax governance, where a system

plagued with a plethora of discretionary, ad-hoc taxes would move toward a

ruled-based, transparent and stable tax regime. This would make the tax system

fairer by ensuring ‘neutrality’ across players, products or services, locations or

business cycles.

We believe that four key themes would emerge, which might have a significant

impact on India Inc.: (a) change in effective tax rates for various products and

services, (b) availability of seamless input credit across the value chain, (c) shift

of trade from currently unorganized segments to organized segments, and (d)

re-jig in supply chain management.

Sectors/companies likely to emerge as gainers: (a) Consumer – Pidilite; Asian

Paints; Century Plyboards (b) Autos – Hero MotoCorp; Maruti Suzuki; Amara

Raja Batteries; Exide Industries (c) Cement – ACC (d) Multiplexes – PVR; Inox (d)

Light electrical – Havells; Crompton Consumer; Symphony; V-Guard (e) Media –

Dish TV (f) Retail – Shoppers Stop, and (g) Logistics – TCI and Gati.

Sectors/companies likely to lose: (a) FMCG – ITC; Titan (b) Media: Print

companies – HMVL; DB Corp; Jagran Prakashan; HT Media (c) Automobiles –

Ashok Leyland.

Approval of the GST constitution bill amendment will be the next trigger for the

financial markets though its initial impact on economic activity will only be

mildly positive. It is unlikely to impact inflation adversely, but could boost

economic activity (subject to effective implementation). Over the longer term, it

holds the potential to boost economic activity substantially, improve the

government’s revenue, and help achieve better transmission of prices.

India Inc. to be big beneficiary



Ushering in a new era

GST



Game changer for economy in longer run



S.Gupta@MotilalOswal.com

Please click here for video link

+91 22 3982 5544

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Revenue neutral initially, but accretive over time



Assuming that GST rate aligns with the revenue neutral rate, as is intended, the

effective tax rate will come down, which will broadly offset the increase in tax

base (since exemption list will be pruned) and most of high-taxes items will be

excluded from GST (at least initially). However, as GST will help reduce tax

evasion, prune exemption list and improve compliance, the receipts will

increase over time. We also believe that the fear among states to lose out on

revenue is misplaced.

Unlikely to raise CPI but could hurt Indian consumers



As far as the impact of GST on inflation is concerned, a moderate GST rate will

help reduce wholesale price index (WPI), while the impact on consumer price

index (CPI) will be limited. However, since services constitute a larger share in

the consumption basket than in CPI, Indian consumers are likely to feel the

pinch of higher prices of services after GST is implemented.

Two key concerns



Firstly, the 1% additional tax, if approved, may defeat the entire purpose of

creating a unified market. Secondly, the exclusion of crude oil and petroleum

products from GST in the initial period makes us skeptical of their inclusion later.

This is because the central government’s support to compensate the state

governments for revenue loss will expire after five years.

Way forward and challenges ahead



A rather long implementation schedule and challenges await us. For the

corporate sector, GST would bring numerous complex changes, which could be

disruptive at least for once.

Grandfathering of existing location-wise benefits through different modes (such

as (a) one-time settlement, or (b) interest-free loans of amount of tax collected)

may adversely impact operating profits of some companies while increasing

their other income.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Four themes under GST with favorably/adversely impacted companies

AUTO: HMCL, MSIL

MEDIA: HMVL, HTML,

CEMENT: ACC

JAPG, DBCL

MEDIA: DITV

CONSUMERS: ITC, TTAN

CONSUMERS: PIDI, APNT, CPBI

AUTO ANCS.: AMRJ, EXID

LIGHT ELECTRICALS: HAVL, CGCEL,

VGRD, SYML

Change of consumer

level effective tax

rates

II.

Shift of trade from

unorganized to

organized

III.

Seamless

availability of input

credits

4 Themes to

impact India

Inc.

IV.

Efficiency in Supply

chain management

MULTIPLEX: PVR, INOL

RETAIL COMPANIES: SHOP

LOGISTICS: TCI, GTIC

AUTOS: AL

Note:

Companies in WHITE likely to be favorably impacted by GST, companies in BLACK likely to be negatively impacted

Source: MOSL

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Impact on sectors

As India Inc.’s tax regime transitions to GST, we are likely to see a varied impact on

companies/sectors. Although it is difficult to quantify this impact, we have tried to

identify sectors/companies under our coverage that could witness a

Positive

(represented by

green

color),

Neutral

(represented by

blue

color) and

Negative

(represented by

red

color) impact. We have shown the level of impact in various

exhibits, where one, two and three circles represent a low, medium and high

impact, respectively.

Exhibit 1: Sector-wise impact of GST

Sector

Auto - Batteries

Change in

Tax rate

Availability of

Input credit

Unorganized

to organized

Supply Chain

Management

Overall









Consumers - Retail









Logistics







Media - Multiplex







Auto - Two wheeler/ Four wheeler







Consumers: FMCG – Ex Alcohol and cigarette





Capital Goods: Light Electrical









Media - Pay TV Distributor





Cement







Metals



Pharma



Capital Goods: Industrial



Media - Pay TV Broadcasters



Textiles



Telecom



Auto - CV





Media - Print Media







Consumers - Cigarette







Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



Our analysis (assuming a standard rate of GST of 18%) suggests that the autos,

consumer, logistics, multiplex, light electrical, media and cement sectors are likely

to be positively impacted, while the consumer (cigarette), print media and auto CV

sectors may be adversely impacted.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Exhibit 2: Some key beneficiaries from GST

Stocks

Impact



AMRJ/

EXID

APNT



CPBI

GTIC

HMCL

INOL

MSIL



PIDI



PVR



SHOP



SYML

TCI

ACC

CGCEL

DITV





HAVL



VGRD



Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



Reasons



Battery segment would benefit from reduction in cost disadvantage vis-à-vis unorganized players (45-50% of

replacement market). Also, for the CV segment, where unorganized players are much more prevalent, fleet

operators can claim offset for GST paid on batteries.



Under GST, the gross effective tax rate for Asian Paints will reduce from 26-28% currently to ~18%. We

believe that the savings on tax outgo will either be retained and drive margin expansion or partially passed

on to the consumer/trade to drive volume growth. There exists a sizable unorganized market (~35%) in the

paints industry; we believe that the company would also benefit from gradual reduction in competition from

unorganized players, with reduction of pricing gap.



Century Ply currently pays average indirect tax rate of 26.5% (excise of 12% and average VAT of 14.5%) which

will partly aid margin expansion and gain from shift of trade from the unorganized (65-70% of market) to the

organized segment, given the reduced taxation difference. Considering the brand equity and quality of

Century Ply, it should benefit from the shift in consumer preference towards to branded products.



Its express logistics segment will witness higher volume growth; plans to enter into third-party warehouse

management.



GST will bring ~8% reduction in on-road prices for Entry level segment (HF Dawn/Deluxe) and Executive

segment (Splendor/Passion). This would improve affordability and expand addressable market for this price-

sensitive segment.



Inox will be a key beneficiary due to reduction of blended effective tax rate and will be able to retain part of it.

Benefit of input credits on lease and maintenance of properties will be available which was not allowed under

erstwhile regime. This in our view can expand EBITDA margin by ~200-300bps



Entry level cars would see reduction in on-road prices by ~8%, driving demand for entry level segment. MSIL,

which has over 80% of this segment, would be the biggest beneficiary.



For Pidilite, gross effective tax rates are expected to reduce significantly to ~18% (v/s 26-28% under the

current regime). Pidilite rarely initiates price cuts and we believe that the savings on tax would drive margin

expansion. We note that the product segments this company caters to have significant presence of

unorganized players. Post GST, it would also benefit from gradual reduction in competition from unorganized

players due to reduction of pricing gap.



PVR will be a beneficiary on account of: (a) entertainment tax of 26.9% in FY16 on net box office collection

(ticket sales constituted ~54% of FY16 revenue), (b) service tax of 15% on advertising revenue (~11% of FY16

revenue), and (c) blended VAT of 8% on F&B revenue (~25% of FY16 revenue). Service tax of ~INR760m paid

on rent, maintenance and other expenses relating to properties was expensed out in FY16, as credit wasn’t

allowed.



Implementation of GST could result in a two-fold benefit for Shoppers Stop: (a) availability of set off of input

tax credit tax on rent (likely benefit of 150bp), and (b) single tax regime will bring majority of transactions of

unorganized players under the tax net and thereby reduce the price gap in retail prices of various items,

spurring organized players’ growth.



Being a leader with 50% market share, it will be a key beneficiary of shift from unorganized to organized sector

as unorganized sector is 80% of total air cooler market of ~5m units. Lower tax rate will result in volume

growth and margins expanding, given the pricing power of the company



It will benefit from increased third-party logistics business (already catering to inbound auto logistics) and also

will get higher volumes for its express logistics segment.



While reduction of effective rates and supply chain costs will bring tangible benefits to the entire cement

sector, we believe that it would be more positive for ACC, where earnings sensitivity will be higher, assuming

homogenous benefits in taxation.



CG CEL would benefit from the shift from the unorganized to the organized sector post GST. Fans which make

up 45% of sales for CGCEL has 25% of sales from the unorganized sector while lighting which is the second

largest category(30% of sales) has 40% sales from the unorganized sector.



The benefits would be two-fold: (a) reduction in current effective indirect taxes from ~23% to 24%, part of

which we believe the company will be able to retain, and (b) higher availability of input credits (of SAD) on set

top boxes.



Likely to be a key beneficiary of GST on two counts: (a) lowering of tax rates (at consumer level) from 26-29%

to 18% might lead to a combination of volume increase and margin expansion, and (b) increase in addressable

market size, as most of the product segments (like fans, lighting, water heaters, air coolers, etc) in which the

company operates has large unorganized markets, which will come under the tax net post GST and provide

level playing field for all players.



Organized market on a blended basis accounts for ~60% of total addressable market size, which should see

further increase due to the shift from unorganized to organized on account of strong brand and distribution of

V Guard.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Exhibit 3: Some companies that may suffer an adverse impact

Stocks

ITC

HMVL/

HTML/

JAPG/

DBCL

TTAN

Impact Reasons



ITC pays blended weighted average VAT of ~24% while the blended central excise is levied at ~38.5% (paid on the

basis of length of stick). The draft bill proposes inclusion of tobacco in GST and chargeable at ~40%, while the central



excise on cigarettes may continue. This may lead to increase in the consumer level prices of the products and may

have an adverse impact on volumes.



Print companies are exempted from the levy of service tax on both ad and circulation revenues. If print ad/circulation

income comes under the GST ambit, print companies will be adversely impacted. The impact will be marginally

cushioned by input credits towards VAT charged on newsprint. Currently, print companies pay 4-5% as VAT on



newsprint cost (~30% of revenue). We believe the ability of the print industry to pass on the tax burden to readers is

limited in an era where print is increasingly becoming less competitive viz-a-viz digital media.



The RNR committee has recommended a GST rate of 2-6% for precious metals. Currently, jewelry attracts no excise



duty and 1% VAT rate. If the committee’s recommendations are accepted, Titan could be impacted.



The pruning of supply chain management and reduction of logistical bottlenecks may lead to a reduction in CV



demand over the medium term. This may impact pure play CV players like Ashok Leyland.

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

GST | Ushering in a new era - Sparkles and shimmers

GST: Complete overhaul of indirect tax system

Dawn of simpler, unified taxation regime



GST will be a destination-based tax on a comprehensive base of goods and services

across the value chain. It aims to address the complexities in the current multiple

taxation regime.

It will subsume the plethora of indirect taxes levied by various levels of government

and help to (a) lower the tax incidence on organized manufacturing, (b) expand the

narrow tax base, and (c) provide ease of doing business.

Considering the federal structure of government, it will have two components – CGST

and SGST. While CGST will be levied and collected by the central government, SGST

will be levied and collected by the state government in whose jurisdiction the goods /

services are consumed.

The RNR Committee appointed by the government has suggested 15-15.5% RNR, with

a high rate of 40% on demerit goods, low rate of 12% on essential goods, and a

standard rate of 16.9-18.9% depending on the choice of exemptions and rates of tax

on precious metals.

Current complex multiple taxation structure…



India has a federal structure of government. The constitution of India provides

autonomy to both the central and state governments to levy taxes on

goods/services at different incidences in the value chain.

The central government levies taxes on the manufacturing of goods (excise),

rendering of services (service tax), and import of goods (customs duty).

The state governments levy taxes on the sale of goods within their jurisdiction

(VAT) and sale of goods when entities within their jurisdiction sell goods to

entities outside (CST) in addition to multiple other levies like excise on alcohol,

entertainment tax, luxury tax, stamp duty, octroi, etc.

Multiple levy of tax by the central and state governments under the current indirect tax regime

Central Taxes

State Taxes

Sales Tax/VAT/CST

Taxes

on sale of goods

Taxes on manufacture of goods

Central Excise Duty

Excise Duty

Tax on import and export of goods

Customs Duty

Taxes on manufacture of alcohol

Others

Tax on rendering of service

Service Tax

Entertainment tax, luxury tax, taxes on

gambling, entry tax, profession tax, etc

EXISTING IMPORTANT

INDIRECT TAXES

Source: MOSL

July 2016

GST | Ushering in a new era - Sparkles and shimmers

…leads to multiple shortcomings



This multi-layered multiple taxation regime leads to (i) an increase in the prices

of goods and services, (ii) narrowing of the tax base, and (iii) dampening of the

ease of doing business.

Further, the variations in thresholds for levy of different duties and disparities in

tax rates applied to the same goods in different states and input and output

goods within the same state lead to taxation disputes and pilferages in the value

chain.

Shortcomings in present indirect tax structure

Unavailability of

input Credit

Limited Taxing Power

of Center and State

Complexity in

determining nature of

transaction

Tax

Cascading

Various Exemptions

Multiple Tax Laws/

Lack of uniformity

A. INCREASE IN PRICE OF

GOODS AND SERVICES

C. EASE OF DOING BUSINESS

Different thresholds

B. NARROW TAX BASE

Source: MOSL

A. Increase in prices of goods and services:

This is primarily on account of non-

availability of input credit across the value chain and tax cascading



Unavailability of input credit:

Taxes paid under one statute are not allowed to

be set off against taxes paid under other statute. Few examples:



Input credit is not allowed for CST paid on interstate movement of goods



Excise duty paid on manufacturing and service tax paid on rendering of

service are not allowed to be set off against VAT paid on the sale of goods

and vice-versa.



Taxes paid under one certain state level taxes cannot be used as an input for

payment of other state taxes like entertainment tax, octroi, entry tax, etc.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Limitations on utilization of input credit in current multilayered tax regime

CENVAT

available only

if tax paid

under the

same statute

CENTRAL

TAXES



Basic Custom Duty



Special Additional

Duty of Custom

(SAD)



Central Excise Duty



Service Tax



Additional Custom

Duty (CVD)

STATE

TAXES

OTHER

STATE

TAXES



Entertainment Tax



Octroi and Entry Tax



Purchase and Luxury

Tax



Tax on lottery,

betting and

gambling



Petroleum products



VAT



Central Sales Tax

CENVAT credit available



Source: MOSL

Tax cascading:

Multilayered taxation structure leads to taxing the tax. For

example, the central government levies excise duty on the basic value of goods.

However, on the sale of the goods, VAT is levied by state governments on the

value of the goods including excise.

Exhibit 4: Multilayered taxation leads to cascading effect

Base Price -

INR100

Cascading effect, as VAT is

charged on excise duty as

well

Excise Duty @12%

Value

INR112

VAT @12.5%

Source: MOSL

Value to ultimate

consumer- INR126

B. Narrow base:

The current taxation base is narrow due to differential thresholds

applicable under various tax laws and differences in the autonomy of the center

and the state governments to levy indirect taxation. This gets further aggravated

with the various area and product-based exemptions granted by both the

central and the state governments.



Differential thresholds:

Currently, different levies have different thresholds for

their applicability. For example: the threshold under excise is INR15m while the

threshold under service tax is INR1m. This results in different tax bases across

different duties, and hence, narrowing of the tax base



Taxing power of center and states:

Currently, the center collects excise duty on

the value of the product only till manufacturing (generally 2/3rd of the value),

resulting in a loss of revenue for the center. State governments do not get any

portion of service tax, which is collected only by the center, resulting in loss of

revenue for the states.



Various exemptions:

Currently, ~300 goods/services are exempt by the center

and ~100 goods are exempt by the state governments. The starting base for the

excise/VAT is narrow and is being further eroded by a variety of area-specific

July 2016

GST | Ushering in a new era - Sparkles and shimmers

and conditional exemptions. Service tax is applicable on all services except those

on the negative list and those specifically exempted by notifications.

Dampening of ‘ease of doing business’:

The applicability of multiple tax laws,

different rules and procedures, different rates/classification of same goods in

different states, and complexity in determining the nature of transactions

further hinder free flow of goods across the country and often lead to increased

litigation issues.



Applicability of multiple tax laws, lack of uniformity in provisions and rates:

The plethora of indirect taxes applicable to businesses currently not only

requires separate registration and assessment, but also subjects businesses to

provisions and rates that vary from state to state.



Complexity in determining nature of transactions:

Under the current division of

taxation powers by the Constitution, neither the center nor the states can

seamlessly apply taxes to bundles (for example: services provided by

restaurants). Further, with increase in the share of taxes on services, the state

governments are keen to classify ambiguous transactions as sale of goods and

levy taxes accordingly (for example: rendering of telecommunication services)

which leads to double taxation.

GST: The simplified indirect tax avatar



GST is proposed to be a comprehensive destination-based indirect tax levy on

the manufacture, sale and consumption of goods and services.

Its main objective is to consolidate multiple indirect taxes into a simple tax,

overcoming the limitations of the current indirect tax structure and creating

efficiencies in administration.

GST will facilitate a seamless flow of input credit across the entire supply chain.

Introduction of GST will rationalize the tax content in product price, enhance the

ability of business entities to compete globally, and possibly trickle down to

benefit the ultimate consumer. Better compliance should address instances of

tax evasion by expanding the base.

States



Sales Tax (VAT)



Central Sales Tax (levied by Centre)



Entertainment Tax (unless levied by local bodies)



Purchase Tax



Octroi and Entry Tax in lieu of octroi



Luxury Tax



State Surcharges and cesses that relate to supply of goods

Exhibit 5: Taxes to be subsumed under GST

Taxes to be subsumed

under GST that finds a

mention in the

Constitutional Amendment

Bill

Center



Central Excise Duty (CENVAT)



Additional Excise Duties



Service Tax



Additional Custom Duty in the nature of

countervailing duty



Special Additional Duty of Customs



Surcharges and cesses that relate to supply

of goods and services



Cesses on rubber, tea, coffee, etc.



Surcharges (National Calamity, Education

A few other taxes that may

be subsumed

Taxes to be subsumed

under GST in due course

by GST Council

Taxes that would be

definitely kept out of GST

Taxes that are unlikely to

be subsumed in GST

and services



Taxes on lottery, betting and gambling



State Excise Duty (except liquor)



Petrol and Petroleum Products

Cess, etc.)



Petrol and Petroleum Products



Basic Customs Duty, Anti-dumping Duty,

Export Duty

Excise Duty on tobacco products

Specific Cess

Specific Central Cess like education and oil

cess



Alcoholic liquor for human consumption



Property Tax



Tax on consumption of electricity



Stamp Duty

Source: Government, MOSL

July 2016

GST | Ushering in a new era - Sparkles and shimmers



Under the new GST structure, both the center and the states would

simultaneously levy GST across the value chain. The center would levy and

collect central goods and services tax (CGST), and the states would levy and

collect state goods and services tax (SGST) on all transactions within the state.

In case of inter-state sale of goods and import of goods in the country, IGST

would be applicable. IGST again would have two components – CGST and SGST.

SGST would go to the state where the ultimate consumption of goods takes

place. The GST framework does not allow for any specific region-wise

exemptions (available for backward areas) or other exemptions; else, these

would result in breaking the value chain. The Empowered Committee of State

Finance Ministers had recommended withdrawal of area-based exemptions and

their replacement with direct central/state government subsidies.

Evolving model and features of GST

Source: Government, MOSL

RNR committee suggests a standard rate of 17-19% under GST



The government appointed group on “Revenue Neutral Rate and Structure of

Rates for the Goods and Services Tax” (Chairman: Arvind Subramanian;

henceforth referred to as “RNR Committee”) had suggested the following

revenue neutral rate (RNR) and rate structure for GST after considering aspects

of base and compliance efficiency under different approaches.

Exhibit 6: The RNR committee placed its comfort on 15-15.5% RNR for GST

RNR

Rate on precious

metals

"Low"

rate (goods)

"Standard" rate

(goods & services)

16.9

17.3

17.7

18.0

18.4

18.9

"High/Demerit" rate

or non-GST excise

(Goods)

Preferred

Alternative

15.5

Source: Government, MOSL

July 2016

GST | Ushering in a new era - Sparkles and shimmers

GST: Addresses shortcomings in the current structure



By subsuming most of the indirect taxes and applying homogenous tax rates on

goods and services, GST will (a) rationalize consumer-level taxes rates, (b)

broaden the tax base, and (c) facilitate the ease of doing business. This will lead

to multifarious benefits both for the government and the corporate sector.

Rationalizing the price of goods and services:

Under the current regime, the

effective tax rates on goods are significantly higher than on services. GST aims to

tax goods and services at a common rate, thereby rationalizing the effective tax

rates for goods and services. Further, tax cascading and availability of seamless

input credits across the value chain would help lower prices.

Amount

100

121

Amount Particulars

Cost

Margin

Value

CGST @ 10%

SGST @10%

Total

Column Calculation Amount

A+B

C*10%

C+D+E

100

120

Amount

Exhibit 7: GST to rationalize tax in product prices

Particulars

Column Calculation

Input Manufacturer- Selling goods in same state

Cost

Margin

Value

A+B

Excise @10%

C*10%

Vat @10%

(C+D)*10%

Total

C+D+E

Output manufacturer – Selling goods outside state

Cost

Margin

Value

G+H

Excise @10%

I*10%

Cenvat

Excise Paid

CST @ 2%

Input tax Credit

Available

VAT Refund claim

Total VAT Paid

Total

Dealer

Entry Tax

Cost

Margin

Value

VAT @ 10%

Total VAT Paid

100

120

-10

-2.64

-8.36

134.6

Cost

Margin

Value

ICGST @ 20%

Input tax credit (CGST

+ SGST)

Total IGST Paid

100

G+H

I*20%

C+D

J-L

120

(I+J)*2%

-E+N

2.64

I+J+M

144

Assumed

P+Q

R+S

T*10%

3.60

138.24

148.24

14.824

Entry Tax

Cost

Margin

Value

CGST@10%

Input tax credit

Total CGST Paid

R+S

T*10%

Utilized out

of J

120

130

13.0

-13.0

0.0

13.0

11.00

2.00

156.0

26.00

13.0

13.00

Amount pd by customer

Tax paid by customer

Tax paid to center

Tax paid to state

Q+S

D+L

N+R

163.1

30.4

12.0

18.4

SGST@10%

Input tax credit

Total SGST Paid

Amount paid by customer

Tax paid by customer

Tax paid to center

Tax paid to state

T*10%

J-V

T+U+X

U+Z

D+E+L-Y

*Assumption of tax rates: excise, VAT, CGST, SGST assumed at 10%

July 2016

GST | Ushering in a new era - Sparkles and shimmers



Broadening the tax base:

GST aims at broadening the tax base by (a) lowering

the threshold limit for applicability of indirect tax, (b) permitting the center to

levy taxes on sale of goods and the states to levy taxes on rendering of services,

and (c) rationalizing the various exemptions available under the current regime.

Differential thresholds:

With the introduction of GST, the threshold for all

indirect taxes would be INR1m, which is significantly lower than the current

threshold of INR15m for excise and in line with the current threshold of

INR1m for service tax.

Taxing power of the center and the states:

With the introduction of GST,

the center would be able to tax the entire value of goods, not just the value

till the point of manufacture. The states would get a proportional share of

the tax on all services provided in the country.

Various exemptions:

With the introduction of GST, the list of product-wise

exemptions is expected to be trimmed to ~100 goods/services (from the

current ~300 goods by the center and ~100 by the state governments).

Further, it is proposed that various area-based exemptions would be

available.

Ease of doing business:

GST aims to simplify the taxation regime by subsuming

most indirect taxes. Further, the following anomalies in the current tax regime

would get addressed:

Determining the nature of transactions:

With the introduction of GST, there

would be no difference between sale of goods and services for the purpose

of taxation. This would lead to reduction in litigation issues and also

facilitate taxation of bundled services.

Uniformity in provisions and rates:

With the introduction of GST, there

would be a single rate of tax for goods and services as well as uniform

provisions/rules for all states and the center. This would facilitate free

movement of goods and services across the country and also lead to greater

compliance.



This is likely to bring multifarious benefits to both India Inc and the economy.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

GST benefits visible in many different shades

Four key themes emerging



Four key themes emerge, which will have an impact on India Inc: (a) change in

consumer-level effective tax rates, (b) shift of trade from unorganized to organized

segment, (c) seamless availability of input credits, and (d) improved efficiencies in

supply chain management.

Sectors/companies likely to emerge as gainers:

(a) Consumer – Pidilite; Asian Paints;

Century Plyboards (b) Autos – Hero MotoCorp; Maruti Suzuki; Amara Raja Batteries;

Exide Industries (c) Cement – ACC (d) Multiplexes – PVR; Inox (d) Light electrical –

Havells; Crompton Consumer; Symphony; V-Guard (e) Media – Dish TV (f) Retail –

Shoppers Stop, and (g) Logistics – TCI and Gati.



Sectors/companies likely to lose:

(a) FMCG – ITC; Titan (b) Media: Print companies –

HMVL; DB Corp; Jagran Prakashan; HT Media (c) Automobiles – Ashok Leyland.

Four themes under GST with favorably/adversely impacted companies

AUTO: HMCL, MSIL

MEDIA: HMVL, HTML,

CEMENT: ACC

JAPG, DBCL

MEDIA: DITV

CONSUMERS: ITC, TTAN

CONSUMERS: PIDI, APNT, CPBI

AUTO ANCS.: AMRJ, EXID

LIGHT ELECTRICALS: HAVL, CGCEL,

VGRD, SYML

Change of consumer

level effective tax

rates

II.

Shift of trade from

unorganized to

organized

III.

Seamless

availability of input

credits

4 Themes to

impact India

Inc.

IV.

Efficiency in Supply

chain management

MULTIPLEX: PVR, INOL

RETAIL COMPANIES: SHOP

LOGISTICS: TCI, GTIC

AUTOS: AL

Note:

Companies in WHITE likely to be favorably impacted by GST, companies in BLACK likely to be negatively impacted

Source: MOSL

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Four key themes to have significant impact on India Inc



Our analysis of GST suggests that four key themes emerge, which will have

significant implications for India Inc:

Change in consumer-level effective tax rates

II.

Shift of trade from unorganized to organized segment

III.

Efficiency in supply chain management

IV.

Decrease in cost due to seamless availability of input credits

Themes under GST with favorably/adversely impacted companies

THEME #1

Change of consumer level

effective tax rates

THEME #2

Shift of trade from

unorganized to organized

THEME #3

Seamless availability of

input credits

THEME #4

Efficiency in Supply chain

management

THEME #1



Change of consumer level

effective tax rates



There exists wide variability in the current effective indirect tax levies across

sectors, primarily on account of (a) different classification of goods and services,

(b) exemptions/concessions available to various goods/services under different

statutes, and (c) cascading impact of taxation, which brings inefficiencies in the

system.

GST is expected to simplify the tax structure and change the effective tax rates

on various sectors by:

(a) Applying uniform taxes across goods and services,

(b) Reducing the current product-level exemptions (with center providing

exemption to 300 products and states to ~100 products) to ~100 products

into a single levy of GST, and

(d) Applying uniform taxes on goods and services across the country

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Factors leading to change in effective tax rates

Treating

goods &

services at par

Exemption

list to be

pruned

Reduction

of Tax

cascading

Uniform

taxes for

goods

across the

country

Source: Government, MOSL



GST is likely to bring a change in effective tax rates for most sectors. However,

this would have a material implication only for those companies (a) that have

the pricing power to retain the decrease or do not have the pricing power to

pass on the increase in effective tax rates, or (b) where increase / decrease in

consumer pricing would impact volume growth, and hence, corporate earnings.

If the recommendation of RNR committee is accepted, the standard rate of

goods will be 17-19%. For the purpose of simplicity, we have used an average

rate of 18% on standard goods for evaluating the benefits for various companies

/ sectors.

Key sectors to benefit:

Autos (Two Wheelers + Passenger Vehicles), Batteries,

Consumer, Cement, Light Electricals, Pay TV Distributors, Multiplexes

Key sectors to be negatively impacted:

Print Media, Textiles, Cigarettes

Exhibit 8: Sector-wise corporate tax rates

Sector

Auto

Two wheeler/ Three

Wheelers

Four Wheeler

Batteries

Consumers

FMCG

Cigarettes

Concessional goods

Others

Cement

Metals

Pharma

Capital Goods - Light

electrical

Capital Goods - project

Information Technology

July 2016

Excise

13.5%*

13.5-29%*

13.5%*

12.50%

Service tax

VAT

12.5%

CST

Other

Effective tax rate

(Approx.)

30-31%

31-49%

30-31%

29-30%

Depending on

length

0-6%

12.5%

@ 12% ad-valorem -

+ Rs6/bag specific

- 30% abatement

12.5%

7.2%

15%

24%

4-12.5%

12.5%

6-22%

29-30%

22-24%

4-5%

12.5%

7.50%

19-21%

12-14%

29-30%

22%

15%

GST | Ushering in a new era - Sparkles and shimmers

Sector

Textiles

Telecom

Logistics

Media

Pay TV Broadcasters

Pay TV Distributor

Print Media

Multiplex

*Including NCCD

Excise

0-12.5%

Service tax

15%

VAT

0-5%

CST

Other

8-10%

24%

Effective tax rate

(Approx.)

2-21%

15%

24-27%

42-43%

Source: MOSL

THEME #2

Shift of trade from



unorganized to organized



India has significant presence of the unorganized sector. A National Commission

for Enterprises in Unorganized Sector (NCEUS) report estimates that in 2005, out

of the 485m persons employed in India, 86% or 395m worked in the

unorganized sector, generating 50.6% of the country's GDP.

GST implementation is expected to narrow the large indirect tax differential

between the organized and unorganized players.

This would be achieved by ensuring better compliance and enforcement by (a)

reducing the threshold limit for exemption from indirect taxes (to INR2.5m

under GST from the current INR15m under excise), (b) tracking the flow of GST

credit in the entire value chain using technology platforms, (c) ensuring

availability of seamless input credit, and (d) reducing the overall effective tax

rates.

Measures that will lead to shift of trade from unorganized to organized

Better

Enforcement



Reduction in threshold limits



Through technology enabled platform



Through availability of Input credit



Reduction in overall effective tax rate

Better

Compliance

Source: MOSL



Key sectors to benefit:

Significant unorganized markets exist in the B2C sectors.

Key beneficiaries: Auto Ancillaries (Batteries), Logistics, Capital Goods (Light

Electrical), Consumer and Retail.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

THEME #3 Seamless availability

of input credits



Under the current regime, the taxes levied by different levels of government /

different states are not allowed to be set off against each other. For example:

Excise duty paid to the central government for manufacture of goods is not

allowed to be set off against state VAT payable on sale of goods and vice versa.

In the service industry, companies have to incur service tax liability on sales.

However, they also spend sizeable portions on capex on which they are

charged VAT. Current regulations do not allow service tax to be set off against

VAT and vice versa.

State VAT paid on inputs in one state is not available for set off if the output is

sold in another state. However, on payment of CST on declared goods, a dealer

can claim refund of VAT paid to the originating state in case of inter-state sale.

Central sales tax of 2% is a non-VATable tax, and hence, increases the cost of

goods.

Companies trading goods (retailers), which pay VAT, are not allowed to claim

credit for the service tax paid on different items since they have no central tax

against which this can be set off.

Unavailability of input credit makes the current system complex and inefficient,

resulting in increased cost for businesses. This is likely to get addressed under

GST when the plethora of multiple taxes is subsumed under a single tax.



Seamless credit of inputs not available currently

Service tax / Excise - credit not

available to retailers

Seem less

credit of

inputs not

available

VAT - credit not available to

service providers

CST - Non VATable

Source: Company, MOSL



This would particularly benefit retailers, multiplexes that operate through leased stores

and pay significant indirect taxes (service tax) on lease rentals. The GST regime would

allow these indirect taxes to be set off.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

THEME #4



Efficiency in supply chain

management



Currently, decision making in supply chain management is based not only on

business requirements but also on tax planning. The current legal framework

exempts CST if interstate movement of goods is for stock transfer and not for

sale.

Consequently, in several sectors, companies open various depots and appoint

C&F agents to avail this exemption and incur additional costs.

Under GST, since CST is subsumed, supply chain management would become a

pure play of business requirements. In several sectors, we expect consolidation

of the current supply chain, leading to reduction in operational cost on the one

hand and lower inventory carrying cost on the other.

Logistics would emerge as a big sector, with consolidation in the industry.

Implementation of GST may also be slightly negative for CV manufacturers, as

this would help ease bottlenecks in logistics, especially time spent at check posts

for local taxes. This would increase the on-road time for the fleet and enhance

fleet productivity, diluting the need for fleet expansion and reducing CV growth

over the medium term.

Exhibit 9: Supply chain consolidation to yield material benefits

Benefits for Industry

Pruning of distribution network

Reduction in inventory carrying

cost

Play on Logistics

Consolidation in Industry

Slight negative impact on CV

manufacturers

Source: Company, MOSL



Key sectors to benefit:

Logistics, FMCG, Metals and Light Electricals

Key sectors to be negatively impacted:

Automobiles – CV Manufacturers

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Impact on sectors

As India Inc transitions to GST, it is likely to witness varied impact on various

sectors. While, it is difficult to quantify to impact of GST on various companies/

sector we have tried to identify Sector/ companies the companies in the MOSL

coverage which are likely to be impacted materially. We have classified the impact

Positive

(represented by

green

color),

Neutral

(represented by

blue

color), and

Negative

(represented by

red

color). We have shown the level of impact in various

exhibits, where one, two and three circles represent a low, medium and high

impact, respectively.

Exhibit 10: Sector-wise impact of GST

Sector

Auto - Batteries

Change in

Tax rate

Availability of

Input credit

Unorganized

to organized

Supply Chain

Management

Overall









Consumers - Retail









Logistics







Media - Multiplex







Auto - Two wheeler/ Four Wheeler







Consumers: FMCG – Ex Alcohol and cigarette





Capital Goods: Light Electrical









Media - Pay TV Distributor





Cement







Metals



Pharma



Capital Goods: Industrial



Media - Pay TV Broadcasters



Textiles



Telecom



Auto - CV





Media - Print Media







Consumers - Cigarette







Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



Our analysis (based on assumption the standard rate of GST at 18%) suggests that

Autos, Consumers, Logistics, Multiplex, Light Electrical, Media, Cement sectors are

likely to be positively impacted while Consumers – cigarette, Print media, Auto

CVs sectors may be adversely impacted.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Autos

Key implications for sector



~8% price reduction for customers:

For most segments, reduction in incidence

of indirect taxes would be ~8% (of on-road price) at consumer level. This would

drive demand expansion, especially in price-sensitive segments like two-

wheelers and entry-level passenger vehicles (PVs).

Shift from unorganized to organized segment in batteries:

GST would reduce

attractiveness of the unorganized segment (45-50% of replacement market).

This would be primarily on account of (a) bridging the price differential between

the organized (with ~8% decline in consumer-level price) and unorganized

players (by bringing them under the tax net, leading to increase in their prices),

and (b) ability of the commercial segment (CVs, taxis, etc) to avail input credit of

GST on batteries (and offset it against their GST liabilities), leading to decline in

net effective cost when buying from organized players.

Easing of logistical bottlenecks = freeing up of fleet capacity?

GST would ease

bottlenecks in logistics, especially the time spent at check posts for

administering local taxes. Subsuming local taxes in GST would ease the

bottlenecks and increase on-road time for the fleet; this would be negative in

the medium term, as increase in fleet productivity would dilute the need for

fleet expansion and reduce CV growth. However, in the long term, it would

reduce the replacement cycle and drive CV demand.

No major benefits on supply chain management:

Our discussions with industry

participants highlight that as a general practice, Automobile companies dispatch

goods directly from factories to dealers and do not route their sales through

depots and C&F agents. Consequently, the benefits from distribution / supply

chain management are expected to be minimal.

Implications for companies

Positive



Amara Raja/Exide:

The

batteries

segment would benefit from shift in trade

from unorganized to organized segment due to reduction in price gap vis-à-vis

unorganized players (45-50% of the replacement market). Also, in the CV

segment (where unorganized players are more prevalent), the fleet operator

can claim offset for GST paid on batteries, thereby reducing the net effective

cost while purchasing from organized players.



Hero MotoCorp:

~8% reduction in on-road prices for entry (HF Dawn/Deluxe)

and executive (Spelndor/Passion) categories would improve affordability and

expand the addressable market for this price-sensitive segment.



Maruti Suzuki:

On-road prices of entry-level cars would reduce by ~8%, driving

demand for the entry-level segment; MSIL, which has an over 80% share of the

segment, would be the biggest beneficiary.

Negative



Ashok Leyland:

The pruning of supply chain management and the reduction of

logistical bottlenecks may lead to a reduction in CV demand over the medium

term; this may adversely impact pure-play CV players like Ashok Leyland.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Exhibit 11: Entry level OEMs and auto ancillary units catering to replacement markets to benefit

Impact Due to

Company

Change in

Tax Rate

Availability of

Unorganized Supply chain

addl. input

to organized management

credits

Overall

Remarks



To benefit from the unorganized to organized

Amara

Raja

Exide

Industries





















Hero

MotoCorp

Maruti

Suzuki

Bajaj

Auto

Bosch

TVS Motor

Bharat

Forge

Eicher

Motors

























segment shift, as pass-through of benefits of

indirect tax savings will reduce the gap vis-à-vis

unorganized.

To benefit from the unorganized to organized

segment shift, as pass-through of benefits of

indirect tax savings will reduce the gap vis-à-vis

unorganized.

HMCL's key segments – entry and 100cc executive

motorcycles – are price sensitive and would see

demand expansion. However, HMCL would witness

increase in indirect taxes, as excise exemption at

Haridwar plant would not be available from FY19.

MSIL's entry-level car segment would benefit

meaningfully, with ~9% price reduction at the

customer level.

Bajaj would see benefit in the entry-level segment

(~25%); premium segment would be relatively

price insensitive. Exports, which contribute ~45%,

would remain unaffected.

Pass-through of benefits to OEMs. Replacement

market sales contribute ~20% and might benefit

from shift from unorganized to organized segment.

TVSL's key segment of mopeds is price sensitive

and would see demand expansion.



Pass-through of benefits to OEMs.



Both RE and CV segments are price insensitive;

Mahindra



hence, no significant impact of change in tax rate.

CV segment may see some adverse demand-side

impact due to easing of logistics bottlenecks.



We expect tractors to be charged at ~12% GST

rate, which will be marginally positive. However,

we expect the luxury car segment (to be taxed at

40% GST) to include PVs with >1.5ltr engines and

thus the relative disadvantage would widen

further.



Pass-through of benefits to OEMs.



Benefit of lower duties would be fully passed

Mahindra

CIE

Tata

Motors

Ashok

Leyland





through, although demand isn't materially price

sensitive. The CV segment may see some adverse

demand-side impact due to easing of logistics

bottlenecks.



Improved efficiency due to removal of logistics

bottlenecks may adversely impact CV demand over

the medium term.

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

GST | Ushering in a new era - Sparkles and shimmers

Exhibit 12: Customers could see up to 8% reduction in on-road price

Rate (%)

Ex-factory

Excise duty

CST

Logistics

Dealer margins

VAT

GST

Ex-showroom

Road Tax/Registration

Insurance (of ex-showroom)

On road

Indirect Taxes (% of ex-Factory)

Indirect Taxes (% of on-road)

*including NCCD

13.5*

12.5

3.5

Current

100

139

155

31.2

20.1

GST

100

127

142

19.4

13.7

Source: MOSL

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Consumer

Key implications for sector



Change in effective tax rates to have mixed impact on Consumer companies:

At present, there is a wide divergence in the effective indirect tax rates of

companies (ranging between 6% and 30%) due to product-specific and area-

based exemptions/concessions. While we believe that the existing area-based

exemptions will be grandfathered (and hence, may not have near-term impact),

the pruning of product-based exemptions may have an adverse impact on some

companies. On the other hand, the lowering of effective tax rates will have a

positive bearing on demand/margins.

Bridging of pricing gap with unorganized players:

GST would reduce the

attractiveness of the unorganized segment (particularly in the Paints, Adhesives

and Plywood industries, where share of the unorganized segment is substantial,

which would now be included in the tax net.

Consolidation of warehouse/logistics operations:

GST would ease logistical

bottlenecks, especially the time spent at check posts for local taxes (drive

operational efficiencies). The companies would also re-evaluate the

consolidation of warehouses versus servicing under the current structure, which

could gradually reduce supply chain management and inventory carrying cost.

Availability of input credit will aid margin expansion for retailers:

Retailers

currently incur 10-15% of their operating expenditure toward rent and

infrastructure service, on which service tax is levied. Given that retailers collect

only VAT on the sale of goods at present, input credit of service tax is not

available. Post GST, the availability of input credit on the services will

additionally be available, which will aid margin expansion.

Tobacco and precious metals to be hit on expected significant increase in tax

rates:

The RNR Committee’s recommendation of levying 2-6% VAT on precious

metals and GST on tobacco at a higher rate of 40% (+ continuing of central

excise) may hurt the industry.

Alco-beverage operating margins may be hit by ~100bp on exclusion from GST:

Alcoholic beverages are likely be kept out of the GST ambit, which will be a

negative for the industry and have an impact of ~100bp at the EBITDA level due

to disallowance of input goods credit. However, industry associations are still

lobbying for inclusion.

Implications for companies

Positive



Pidilite and Asian Paints:

Under GST, the gross effective tax rates for Pidilite and

Asian Paints are expected to reduce significantly to ~18% (v/s the current 12.5%

VAT and 12.5% excise). We believe that the savings on tax outgo would either

be retained (drive margin expansion) or partially offered to the consumer/trade

via offers to drive the incipient volume growth. Pidilite rarely initiates any price

cuts and, hence, could be a greater beneficiary. Also, we note that there is a

significant presence of unorganized players in the product segments to which

July 2016

GST | Ushering in a new era - Sparkles and shimmers



these companies cater. Post GST, they would also benefit from gradual

reduction in competition from unorganized players due to reduction in pricing

gap between organized and unorganized players.

Shoppers Stop:

GST could result in a two-fold benefit for Shoppers Stop: (a)

opportunity to set off input tax credit on rent (likely benefit of 150bp), and (b)

reduction of price gap vis-à-vis unorganized players, as a single tax regime will

bring most transactions of unorganized players under the tax net.

Century Ply:

The plywood industry is currently dominated by unorganized

players, with 65-70% market share. Post GST, Century Ply will gain from shift of

trade from the unorganized to the organized segment, given the reduced

taxation difference (as unorganized segment will come under tax net).

Considering the brand equity and quality of Century Ply, it should benefit from

the shift in consumer preference towards to branded products.

Negative



ITC:

ITC pays blended weighted average VAT of ~24% while the blended central

excise (charged on length of sticks) is levied at ~40%. The RNR Committee

proposes inclusion of tobacco in GST (at a rate of ~40%) and continuance of

central excise on cigarettes; this may increase consumer-level prices of products

and may hurt volumes.



TTAN:

The RNR Committee has recommended a GST rate of 2-6% for precious

metals. Jewelry currently attracts 1% VAT and no excise duty. If the RNR

Committee recommendations are accepted, TTAN could be impacted.

Exhibit 13: Shift from unorganized to organized to benefit Consumer sector

Impact due to

Company

Asian Paints

Century Ply

Change in

Tax rate

Addl. Input Unorganized Supply chain

credits

to organized management

Overall

Remarks



With unorganized companies coming under the tax













Pidilite



















SHOP

BATA

Colgate

HUVR









Britannia



net, the paints industry will witness a gradual shift

toward organized players.

Shift of trade from unorganized (~70% currently) to

organized

segment

will benefit branded players like

Century Ply.

Given Pidilite’s pricing power, it can partially retain

the benefit of lower tax rates, driving margin

expansion. Also, shift

from

the unorganized to

organized segment can bring additional volume

growth.

SHOP would benefit due to availability of input credits

on service

tax

on rent and infrastructure.

The organized segment accounts for 30-35% of total

footwear market in India, which is expected to

gradually

increase

due to unorganized sector coming

under tax ambit.

Marginally benefits from lowering of current effective

indirect taxes from 20-22% to 18% and pruning of

supply

chain

under GST.

Marginally benefits from lowering of current effective

indirect taxes from 20-22% to 18% under GST and

improved efficiency on supply chain management.

Slight adverse impacted from increase in effective tax

rates as the company’s products today enjoy

concessional rate of excise. Pruning of supply chain

may yield some benefits.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Impact due to

Company

Change in

Tax rate

Addl. Input Unorganized Supply chain

credits

to organized management

Overall

Remarks



Grandfathering of tax incentives in some of its plants

Dabur





GCPL





Jyothy Labs





Page





Emami

JUBI







Marico





TTAN

ITC













may

continue

to benefit over the medium term but

may have an adverse impact in the long term.

Increase

tax incidence in package juices will be a

pass through, in our view.

International business is half of sales and won’t be

affected.

Effective indirect tax incidence is higher than possible

rate of 18% and thus a positive but the same will be

passed on.

JYL could be impacted marginally, as its current

blended

VAT

(9.5%, however JYL is paying lower VAT

in fabric whitener segment) and excise duty (~4%,

given location-based advantages) is lower than the

proposed rate.

Marginally negative for Page, given that it currently

pays lower taxes (5.5% VAT and nil excise, given the

benefits to

textiles

industry). Availability of input

credits and company’s pricing power will partially

negate the impact.

Current effective tax rates are lower at 7.5% due to

product-level concessions. Increase in tax rates under

GST may

have

an negative impact on

volumes/margins.

Effective tax rates are in range of 15-16%. Increase in

tax rates is

likely

to adversely impact the company.

Marico pays negligible/ miniscule excise and 6% VAT.

If concessional rate of 12% on coconut oil get applied

which may have some

adverse

impact on the

company.

International

business is 23% of sales and will not be

impacted

If RNR Committee recommendation of 2-6% tax is

accepted, TTAN could be impacted, as this could

impede sales from exchange of old gold jewelry.

Rise in effective tax rates as proposed by RNR

Committee

will lead to higher consumer level prices

and potentially impact volumes adversely.

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

GST | Ushering in a new era - Sparkles and shimmers

Logistics

Key implications for sector



Promote hub-and-spoke model:

GST will create a single national market. We

believe this would lead to a realignment of warehousing and supply chain

requirements of companies. Instead of maintaining warehouses in each state to

comply with each state’s tax structure, companies would focus on creating

regional hubs that cater to their regional markets.

Exhibit 14: GST will promote the hub-and-spoke model, leading to higher outsourcing and thereby benefit logistics

companies

Source: KPMG, MOSL



Supply chain management to get a boost:

We believe that the expected shift to

the hub-and-spoke model will increase the market opportunity for organized

logistics players. Warehouse size will increase significantly and operations will

be more automated, necessitating bringing in the organized logistics companies

to manage the supply chain.

Expect reduction in transit time:

Inter-state checkpoints (where state

authorities review and examine freight to apply appropriate duties) currently

add to the transit time of goods through roads, increasing delays by 5-7 hours.

According to World Bank, transit times can improve by 20-30% if delays due to

roadblocks, tolls and other stoppages are halved. The reduction of checkpoints

will directly improve transit times, thereby reducing the cost of logistics

companies.

Organized sector to boost partially at the cost of unorganized:

The logistics

sector is largely fragmented and comprises many unorganized players. Due to

tax avoidance by unorganized players, there exists a cost gap between

organized and unorganized players. We expect the cost competitiveness of

July 2016

GST | Ushering in a new era - Sparkles and shimmers



unorganized players to reduce post GST as they are brought under the tax base,

thus shifting volumes to organized players.

Rising tax rates will have no material impact for the sector:

For the logistics

sector, the effective tax rate will increase from 14.5% currently to 18% under

GST. However, it will have no meaningful impact for the sector, as these services

are generally on B2B transactions, where the taxes will be passed through and

the recipient of service will be able to claim a set-off against taxes on output.

Implications for companies

Positive



TCI:

It is likely to be one of the key beneficiaries of the GST bill. Majority of TCI’s

revenue is derived by providing full truck-load (FTL) and less than truck load

(LTL) road freight services via its TCI Freight division. While TCI Freight

contributes the maximum revenue (37% of FY16 revenue), its EBITDA margins

are the lowest (3-5%). By gradually eliminating unnecessary inter-state border

checks, the GST bill is likely to lead to seamless truck movement. It is estimated

that transit time and resultant costs could be reduced by 20%-30%. Further,

through the creation of hub-and-spoke modeled warehousing chains, GST will

eventually increase tonnage of trucks, thus ensuring cost efficiencies. TCI Supply

Chain Solutions will further benefit from increased demand for warehousing

solutions.



GATI:

The Company will be the other key beneficiary of GST. Through the

creation of a national market and eventually hub-and-spoke modeled

warehousing chains, GST will create a larger market for GATI’s supply chain

management solutions business. GST is also likely to lead to proliferation of e-

commerce in India, creating immense revenue opportunities for GATI’s e-

commerce solutions.

Exhibit 15: Consolidation of supply chain management to drive benefits for large logistics companies

Impact due to

Company

Change in

Tax Rate

Addl. input Unorganized Supply chain

credits

to organized management

Overall

Remarks



Its express logistics segment will witness higher

Gati



















TCI

VRL

Allcargo

Logistics

volume growth; plans to enter into third-party

warehouse management.



It will benefit from increased 3PL business

(already catering to inbound auto logistics) and

also will get higher volumes for its express

logistics segment.



Benefit for its express logistics business.

Potentially can enter into 3PL services.



Its contract logistics business could witness

high growth, already doing some 3PL business

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

GST | Ushering in a new era - Sparkles and shimmers

Capital Goods

Key implications for sector



Light Electricals sector to benefit more on reduction of tax rates:

Overall, GST

should be positive for the sector, since it lowers the effective indirect taxes to

~18% from the current 29-30%. We believe GST will be more positive for the

Light Electricals segment, where companies may benefit from volume growth

and margin expansion. For industrial capital goods, we believe most of the

benefits will be passed on to customers owing to the current weak demand

scenario. Volume-based pickup in demand would depend on economic capex

cycle recovery rather than pricing cuts.

Increase in addressable market a big opportunity for Light Electricals sector

In Light



Electricals (fans, motors, pumps, cables and lighting), there is significant

presence of unorganized players. We believe GST will bring unorganized players

under the tax net and, hence, provide a level playing field to companies like

Havells, Symphony, Crompton Consumer and V-Guard.

Rejig of supply chain will also yield benefits:

The fast-moving electrical goods

companies currently operate by opening depots / appointing C&F agents in

every state for tax planning. Post GST, the distribution supply chain will be

consolidated and lead to savings in distribution and inventory carrying cost.

Implications for companies

Positive



Havells/ V-Guard/Symphony/ Crompton consumer:

These are likely to be key

beneficiaries of GST on two counts: (a) lowering of tax rates (at consumer level)

from 26-29% to 18% may benefit them from a combination of volume increase

and margin expansion, and (b) increase in addressable market size, as most

product segments (like fans, lighting, water heaters and air coolers) in which

these companies operate have large unorganized players, who will come under

the tax net post GST and provide a level playing field for all players. Further,

improved efficiencies in supply chain management will also aid margin

expansion.

Capital Goods companies have a mix of product and project revenues. Currently,

the effective tax rate for products is ~29% (12.5% excise, 2% CST in case of inter-

state movement, and 12.5% VAT). In case of projects, which are treated as

works contracts, 60% is assumed as products (attracts excise duty and VAT) and

40% as services (attracts service tax); the effective tax rate is ~22%.

Current tax rates for sector



July 2016

GST | Ushering in a new era - Sparkles and shimmers

Exhibit 16: Light Electricals segment to benefit on shift from unorganized to organized

Company

Impact due to

Change

Availability of Unorganized Supply chain

in Tax rate addl. input to organized management

credits

Overall

Remarks



Of the total air cooler market of ~5m units, the

Symphony













Crompton

Consumer











Havells











V Guard

Industries











ABB India





Siemens

India





Voltas





Bharat

Electronics





BHEL





Crompton

Greaves





Cummins



unorganized segment accounts for ~80% (4m).

SYML has 50% market share in the organized

segment. A shift from unorganized to organized

segment will result in substantial gains for

SYML. Further, lower effective tax rates would

result in volume growth and margin expansion,

given the company’s pricing power.

Significant benefits will accrue due to (a) shift

of trade in fans and lighting from unorganized

to organized, (b) lowering of effective tax rates,

which may be passed on but will drive volume

growth, and (c) improved efficiency in supply

chain management.

Significant benefits will accrue due to (a) shift

of trade in cables, fans, switchgear and lighting

from unorganized to organized, (b) lowering of

effective tax rates, which may be passed on but

will drive volume growth, and (c) improved

efficiency in supply chain management.

On a blended basis, the organized market

accounts for ~60% of the total addressable

market, which should expand further due to

the shift from unorganized to organized.

Benefit will arise from shift to organized players

for motors, switchgear, pumps and inverters,

where there is significant presence of

unorganized players.

Benefit of lower duties would be fully passed

through, and demand would be more volume

driven.

Siemens will benefit from shift of trade from

unorganized to organized players in motors and

switchgear. Benefit of lower duties would be

fully passed through and growth would be

more volume driven.

~50% of sales is from products and the balance

from projects. Voltas will benefit from

reduction in effective tax rates for consumers,

which will boost volume growth.

40% of sales is from system integration, where

service tax is applicable. Impact of taxes is

passed through. See no significant impact of

GST.

Power and industrial segments are demand

driven and not price sensitive. Benefit of lower

duties would be fully passed through, although

demand isn’t price sensitive.

Power and industrial segments are demand

driven and not price sensitive. Benefit of lower

duties would be fully passed through, although

demand isn’t price sensitive.

~40% of sales exempt from excise duty as

export from SEZ. On the remaining, the regular

duty rates are applicable. Do not see much

impact of GST.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Company

Impact due to

Change

Availability of Unorganized Supply chain

in Tax rate addl. input to organized management

credits

Overall

Remarks

L&T

Core E&C

segment)

Thermax

Inox Wind



Complete projects business – so, service tax,



excise duty and VAT are payable. Do not see

much impact of GST. B2B business and any

change in tax rate will be passed through.



60% of sales is from projects while 40% is from

products. Benefits of lower tax rates will be

passed though; so not much impact from GST.



With GST, the relative advantage over

competition on tax breaks at Himachal Pradesh

plant may reduce.

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

GST | Ushering in a new era - Sparkles and shimmers

Cement

Key implications for sector



Reduction of duties to increase savings by INR300-500/ton:

Reduction of

indirect tax rates from the current 23-25% of gross realization [comprising

excise duty (@ 12% ad-valorem + INR6/bag specific - 30% abatement) and sales

tax (at 12.5%)] to 18% under GST will effectively lead to a benefit of INR300-

500/ton. Given that EBITDA of Cement companies is currently in the INR500-

800/ton range, upgrade potential would be significant, assuming no pass-

through to customers. However, part of the benefit could be passed on to the

customer; hence, upgrade in EBITDA/ton could be in the INR0-500 range.

Savings from rejig in supply chain management:

Cement sector’s distribution

channel currently operates through C&F agents and depots to (a) help establish

reach, and (b) save on levy of CST during inter-state shipping of goods. Post GST,

since CST will be subsumed, the entire distribution planning will be pruned and

will be only be as per business requirements. This will result in some savings for

companies in the form of lower distribution and inventory carrying costs.

Implications for companies

Positive



ACC/ JKLC/ Prism:

While the reduction of effective rates and supply chain costs

will bring tangible benefits to the entire sector, we highlight that it would be

more positive for ACC in large caps, and JKLC and Prism in midcaps, where the

earnings sensitivity will be higher, assuming homogenous benefits in taxation.

Amount

6,020

301

231

4,629

6,020

1,083.6

4,936.4

307

Source: MOSL

Exhibit 17: Proforma benefits of GST

Particulars

Gross Realization(INR/ton)

Gross Realization(INR/bag)

Less Sales Tax (@12.5%)

Less Excise Duty( @ 12.3% ad-valorem + Rs6/bag specific - 30% abatement)

Net Realization(INR/Bag)

Net Realization(INR/ton)

Gross Realization(INR/ton)

Less GST @18%

Difference in net realization (INR/ton) pre and post GST

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Exhibit 18: Reduction of taxes to be a big positive

Company

ACC

JKLC

PRISM

ACEM

DBEL

ICEM

JKCE

ORCMNT

RAMCO

SRCMT

UTCEM

Change in

Tax rate

Addl. input

credits

Impact due to

Unorganized to

organized

Supply chain

management

Overall

Remarks



Reduction in effective indirect









tax will boost profitability for

the sector even when part of

it gets passed on to the

consumers. Lower the profit

base, higher the benefits –

ACC among large caps; JKLC,

Prism among midcaps. Minor

supply chain benefits in terms

of optimizing distribution

channel.

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

GST | Ushering in a new era - Sparkles and shimmers

Multiplex

Key implications for sector



Lowering of effective tax rate will aid margin expansion:

Multiplexes currently

pay multiple indirect taxes: (a) entertainment tax of 24-26% on box office

collection (55-60% of total revenue), (b) service tax of 15% on advertising

revenue (~10% of revenue), and (c) VAT of ~8-10% on F&B revenue (20-25% of

revenue). While the increase in VAT on F&B and service tax on advertising

revenue will increase tax rates, it will be more than offset by significant decline

in entertainment tax, considering the high proportion of ticket sales (box office

collection) in total revenue. We believe that multiplexes have significant pricing

power to retain the benefits, which will lead to margin expansion.

Availability of input credit to lower operating cost:

Multiplexes currently

largely operate through leased premises and incur significant cost on rentals and

infrastructure, on which they pay service tax. In the absence of any significant

service tax / excise liability on output, the service tax paid on input is not

available for set off, and hence, expenses as cost. Under GST, post the

subsuming of all taxes, the credit of taxes on rentals and infrastructure services

will be available even against box office collections and F&B revenue, which will

lower the operational cost and drive margin expansion.

Implications for companies

Positive



PVR:

Blended entertainment tax payable on net ticket sales is 26.9% in FY16

(ticket sales ~54% of revenue). VAT on F&B on blended basis stands at 8% (~25%

of revenue). Service tax on advertising revenue stands at 15% (~11% of

revenue). Close to INR760m of service tax paid (in FY16) on maintenance and

other expenses of properties is expensed out currently since no credit is allowed

against it. Considering that all the current indirect tax levies would be converged

in GST, the credit of duties currently lost will be available. We believe that this

should lead to a margin expansion of ~440bp (at 18% GST).

Inox Leisure:

Blended entertainment tax payable on net ticket sales is 23.8%

(ticket sales ~65% of revenue). VAT on F&B on blended basis comes to 10%

(~20% of revenue). Service tax on advertising revenue stands at 15%. Under

GST, post all taxes converging into GST, the credit of taxes on rentals and

infrastructure services will be available even against box office collections and

F&B revenue—which will lower operational cost and drive margin expansion.

We estimate that this should lead to a margin expansion of 200-300bp.

Impact due to

Exhibit 19: Reduction of tax rates to boost earnings

Company

Change in

tax rate

Addl. Input

credits

Unorganized

to organized

Supply chain

management

Overall

Remarks



Significant beneficiary on account of

PVR

Inox Leisure











Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

subsuming of entertainment tax and

availability of input credit on

services.

GST | Ushering in a new era - Sparkles and shimmers

Media

Key implications for sector



Change in effective tax rate positive for pay TV distributors, negative for

broadcasters:

Effective indirect taxes for broadcasters, primarily comprising of

service tax (at 15%), getting subsumed by a higher rate of GST (at ~18%) will

adversely impact the sector. However, for pay TV distributors (DTH and cable

companies), GST will lead to lowering of the effective tax rates, as alongside

service tax, the state-levied entertainment tax (in the range of 8-10%) also gets

subsumed.

Availability of additional input credit positive for pay TV distributors:

Under

the current regime, distribution platforms pay basic customs duty + CVD + SAD

on set-top-box imports; however, they receive input credit only to the extent of

CVD. Under GST, SAD too would be available as credit that can be availed

against GST.

Print sector currently exempted from indirect taxes may be subjected to tax

under GST:

Print companies’ revenues (advertisement and circulation) currently

remain outside the tax ambit. Print companies also pay sales tax/VAT on the

newsprint cost (~30% of revenue), the credit of which is not available; if print

revenues are included in GST, the net impact would be negative—partially

restricted by the corresponding input credits toward CST/VAT.

Company-wise impact

Positive



Dish TV:

Dish TV will benefit from GST on two counts (1) lowering of effective

tax rates, as both service tax and entertainment tax (ET) get subsumed in GST,

and (2) additional input tax credit on set top boxes. We believe Dish TV will be

able to retain the reduction in tax rates, which will favorably impact margins.

Amongst pay TV distributors, Dish TV should gain the most as (a) subscription

income accounts for 90%+ of revenue, and (2) unlike the cable set-up, where

the onus of ET collection/payment in most geographies lies with the LCOs (MSOs

collect ET in select geographies), DTH companies collect/pay ET at a pan-India

level.

Marginally negative



Zee/Sun:

Broadcasters are likely to be negatively impacted, as service tax rates

increase from 14.5% to 18%. We believe large broadcasters like Zee/Sun have

enough pricing power to pass on the additional cost and will face limited

adverse impact. However, smaller/niche broadcasters will be impacted.

Negative



DB Corp/JAGP/HT Media/HMVL:

Print companies are exempted from the levy

of service tax on both ad and circulation revenues. However, if print

ad/circulation income comes under the tax ambit, print companies will be

adversely impacted. The impact would be marginally cushioned by input credits

toward VAT charged on newsprint. Currently, DB Corp/JAGP/HT Media/HMVL

July 2016

GST | Ushering in a new era - Sparkles and shimmers

pay 4-5% as VAT on newsprint cost (~30% of revenue). Our industry interactions

suggest that inclusion of ad/circulation revenue under the tax net remains a

low-probability event. However, assuming such an event plays out, we believe

the ability to pass on the tax burden to readers is limited in an era wherein print

is increasingly becoming less competitive vis-a-vis digital media.

Exhibit 20: Pay TV distributors to be the likely beneficiaries

Company Name

Change in

tax rate

Availability

of addl.

input credits

Impact Due to

Unorganized

to organized

Supply chain

management

Overall

Remarks

Dish TV

Den Networks

Hathw ay

Siti Cable











Net beneficiary of reduction in tax

rates, which the company will be

able to retain.



Same as Dish TV. However,

proportion

subscription

revenue is lower than DTH and

entertainment tax liability is borne

by LCOs in certain areas.



Dominant player in the South.

SUN TV

Zee Ent.

DB Corp

HT Media

HMVL

Jagran

Prakashan









Impact will be negligible as the

increase in tax rate will be a pass

through.



It is amongst the top 3 Hindi

language broadcasters. Increase in

tax rate will largely be a pass

through.



Applicability of indirect taxation

(currently exempted) will be

negative.

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

GST | Ushering in a new era - Sparkles and shimmers

Pharmaceuticals

Key implications for the sector



Supply chain consolidation will help optimize cost:

Most pharma companies

today operate through C&F and depot mechanism in most states. GST will

enable pharma companies to rationalize their distribution networks through

consolidation of depots/warehouses and better inventory management.

Increase in tax rates may have limited adverse impact:

The effective tax rate

for pharma companies is currently 12-14% (primarily comprising 6% excise and

4-5% VAT and 2% CST). We believe that the levy of GST for most pharma

products will be at concessional rates of ~12%. Pharma companies will have the

pricing power to pass on the burden of additional taxes to consumers.

Removal of area-based exemptions may have adverse impact in long term:

Most pharma companies currently enjoy area-based exemptions on indirect

taxation. While the existing area-based exemptions are likely to be

grandfathered and may not have an impact in the near term, the future non-

availability of such exemption may have a slight adverse impact on the sector.

Impact Due to

Unorganized

to organized

Exhibit 21: Supply chain benefits to accrue for companies with significant domestic presence

Company Name

Change in

tax rate

Availability

of addl. input

credits

Supply chain

management

Overall

Remarks

GLX

SANL





No exports. However, increase



ARBP





CDH

CIPLA

DRRD

GNP

LPC

SUNP











Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



in taxes will be passed through.

Domestic business contributes

75% of sales. However,

increase in taxes will be passed

through.

India business at 14%, primarily

API which gets taxed at higher

rates. Benefits of lower

taxation in the GST regime will

be passed through.

Domestic business contributes

35% of sales. Increase in tax

rates will be passed through.

42% of sales from India.

Increase in tax rates will be

passed through.

Only 11-12% of sales are from

India.

Domestic business contributes

25% of sales.

~22% of sales from India.

Increase in tax rates will be

passed through.

Domestic business contributes

23% of sales. Increase in tax

rates will be passed through.

July 2016

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Metals

Key implications for sector

Indirect tax burden to rise from ~16% to 18% (proposed), but net realization to be

unchanged:

Metal companies have to pay an excise duty of ~12% and VAT of ~4%,

which is proposed to rise to ~18% under GST. Although the tax burden is likely to

rise, we do not expect any impact on net realization of companies. Demand for

metal products to an extent is price inelastic (a 5% drop/rise in steel prices will not

impact construction activity). Metal companies can easily pass on the impact of

higher indirect taxes to consumers, in our view.



Savings on CST/entry tax/octroi on raw material on which input credit is

currently not available:

Taxes such as CST/entry tax/octroi on raw materials add

to a company’s cost. Sourcing raw material from other states adds to cost,

providing arbitrage benefit to companies that can source raw material from

within the state (like Tata Steel getting iron ore for its Jharkhand plant from its

mines in the state as against SAIL getting it from another state). Based on data

available publically, in FY15, SAIL had to pay an entry tax of INR3.8b,

representing ~1% of its net revenue. Under GST, SAIL will save cost on this front.

Data on entry tax/octroi is not made available by other companies; hence, we

are unable to ascertain the benefit to other metal companies.



Unorganized market coming under tax ambit, but this market is small:

The

metal industry (particularly steel) also has to deal with tax evasion by the

unorganized players, putting the organized players at a disadvantage (more so,

as metal products are typically homogenous across suppliers). Unorganized

players coming into the tax ambit will bridge this arbitrage. However, empirical

evidence suggests that the unorganized market is not large and even if the tax

bracket is expanded, the incremental benefit is insignificant.

Exhibit 22: Availability of input credit to slightly benefit metal companies

Impact Due to

Company

Tata Steel

JSW Steel

SAIL

JSPL

Hindalco

NALCO

Change in

tax rate

Addl. input Unorganized Supply chain

credits

to organized management

Overall

Remarks



Increase in effective tax rate will be passed on to



consumers as the demand is fairly price inelastic.

Entry tax/CST on input raw material currently adds

to production cost; will get a relief under GST.

Supply chain rejig will bring some benefits for the

sector while the impact of shift from unorganized

to organized will be limited given that the overall

unorganized market is small.



Currently no taxes on iron ore. Input raw material

NMDC



is a small part of total production cost. There are

no supply chain issues in iron ore market. Hence,

Neutral.

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



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Telecom

Key implications of GST for the sector



Rising tax rates will be negative:

Increase in service tax from 15% to 18% would

be mildly negative for the sector. In case of post-paid subscribers (~20% of

revenue), the impact would be fully passed on to subscribers. For pre-paid

subscribers, there could be a short-term disruption, with hit on the realized rate

per minute in case the tax increase is not passed through due to competitive

pressures. In case the price increase is passed through in two stages, there will

be interim pressure on pricing and profitability. If fully passed through, there

could be a short-term traffic volume impact on companies.

Additional input credit of SAD/VAT on infrastructure cost:

Telecom companies

currently pay only service tax and are not able to attain the benefit of SAD/ VAT

paid on entire infrastructure purchased. However, even in the current scenario,

the license fee and spectrum charges are not subject to any tax levy and hence

no significant benefit from this.

Exhibit 23: Rising tax rate to marginally impact Telecom companies

Company

Impact due to

Change in Availment of Unorganized Supply chain

Tax rate

addl. input to organized management

credits

Overall

Remarks

Bharti

Infratel

Bharti

Airtel

Idea

Cellular

Reliance

Communications



Increase in tax rate will be a pass through given



that the business is B2B and the customers will

be able to claim a set off of input taxes against

their output tax liability



Increase in service tax rate to be slightly negative



Increase in service tax rate to be slightly negative



Increase in service tax rate to be slightly negative

Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



July 2016

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Textiles

Key implications for sector



Increase of output taxes may be not be materially negative:

For the textile

sector, a significant proportion of sales is derived from exports, which will

continue to be zero-rated. For domestic sales, there is lack of clarity on taxability

under GST, considering textiles to be goods of basic necessity. However, if the

output taxes are imposed on the sector, we believe that there will be an adverse

impact on demand over the medium term.

Unorganized to organized shift may not have material impact on demand:

Though there is a big unorganized market, significant pricing difference between

unorganized and organized players may not warrant a material shift to

organized players under GST.

Impact due to

Exhibit 24: Increase in tax rates may marginally impact domestic business

Company

Indo Count

Industries

Kitex

Garments

Change in

tax rate

Availment of

addl. input

credits

Unorganized

to organized

Supply chain

management

Overall

Remarks





Entire revenue from exports; hence,

will have no impact.



Arvind has a sizable (~85%) domestic

Arvind



Highly Negative

;

Negative



; Slightly Negative



; Neutral

●;

Slightly Positive

;

Positive

;

Highly Positive



business. We believe the increase in

output taxes will adversely impact

domestic demand. However the

branded business has the pricing power

to pass on the increase in tax rates

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Banking and Financial Services

Key implications for sector



Negligible impact due to rate increase:

Currently, fee-based income attracts

service tax, whereas interest income is exempt. Under GST, the effective tax

rate for fee-based services will increase to ~18% from the current 15%, resulting

in a moderate increase in certain costs like loan processing charges, insurance

premium, credit card charges, etc. Fee-based income was higher for private

sector banks at 30% (median) of core income v/s 18% (median) for PSUs. We

believe banks will pass on the higher taxes to consumers.

Input cost will increase marginally:

Input services will attract a GST rate of

~18%, higher than the current 15% rate, resulting in a higher cost for banks, as

CENVAT credit is available only for 50% of the input service taxes paid and the

rest is expensed. This will be partially offset by availability of proportional credit

on purchase of goods, which is not available in the current regime.

Ease of doing business:

Since GST is a destination-based levy, companies would

be required to take multiple registrations at all states where services are

rendered. This will increase the administration and compliance for banks, which

currently operate with a single central registration.

Exhibit 25: Fee-based income of private sector banks higher

Bank

PSU Banks

SBI

PNB

Canara

BoB

BoI

UBoI

Private Sector Banks

ICICI Bank

HDFC Bank

Axis Bank

Yes Bank

IndusInd Bank

Fee as a % of core Income

Source: MOSL



Impact on companies:

Increase in tax rates will be passed through. There will be

no material impact on the BFSI sector.

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Information Technology

No material implications for sector



No material impact from increase in effective indirect tax rates:

The Indian IT

industry derives 74% of its revenue from exports, which are currently exempt

from service tax and will continue under GST. For listed players, the proportion

of domestic revenues is even lower. Tier-I vendors derive 2.3-6.5% of their total

revenue from India, and a negligible proportion is contributed by hardware

sales. On account of this, the impact of GST on listed Indian IT vendors would be

meager in the overall scheme of operations.

Reduced litigation:

With the dawn of GST, litigation regarding classification of

canned software as goods or service will end, as GST does not have a distinction

between goods and services.

Ease of doing business:

GST, being a destination-based levy of tax, will require

service providers to take multiple registrations at all locations, where services

are rendered, against the current practice of single centralized registration.

Impact on companies:

Since significant proportion of exports is derived from

exports it will not have a meaningful impact for any company.

July 2016

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Economic impact of GST



Game changer in the longer run: Approval of the GST constitution bill amendment will

be the next trigger for the financial markets though its initial impact on economic

activity will only be mildly positive. It is unlikely to impact inflation adversely, but

could boost economic activity (subject to effective implementation). Over the longer

term, it holds the potential to boost economic activity substantially, improve the

government’s revenue, and help achieve better transmission of prices.

Revenue neutral initially, but accretive over time: Assuming that GST rate aligns with

the revenue neutral rate, as is intended, the effective tax rate will come down, which

will broadly offset the increase in tax base (since exemption list will be pruned) and

most of high-taxes items will be excluded from GST (at least initially). However, as GST

will help reduce tax evasion, prune exemption list and improve compliance, the

receipts will increase over time. We also believe that the fear among states to lose out

on revenue is misplaced. .

Unlikely to raise CPI but to hurt Indian consumers: As far as the impact of GST on

inflation is concerned, a moderate GST rate will help reduce wholesale price index

(WPI), while the impact on consumer price index (CPI) will be limited. However, since

services constitute a larger share in the consumption basket than in CPI, Indian

consumers are likely to feel the pinch of higher prices of services after GST is

implemented.

There are two key concerns in the proposed GST. Firstly, the 1% additional tax, if

approved, may defeat the entire purpose of creating a unified market. Secondly, the

exclusion of crude oil and petroleum products from GST in the initial period makes us

skeptical of their inclusion later. This is because the central government’s support to

compensate the state governments for revenue loss will expire after five years.

Economic impact on GST

How will GST impact

government receipts?

Will inflation rise post

GST implementation?

Will GST accelerate

growth?

Key concerns from the

proposed GST

July 2016

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How will GST impact government receipts?

Revenue neutral initially, but accretive over time

Assuming that GST rate aligns with the revenue neutral rate, as is intended, the effective

tax rate will come down, which will broadly offset the increase in tax base (since

exemption list will be pruned) and most of high-taxes items will be excluded from GST (at

least initially). However, as GST will help reduce tax evasion, prune exemption list and

improve compliance, the receipts will increase over time. We also believe that the fear

among states to lose out on revenue is misplaced

India’s tax-to-GDP ratio is one of the lowest among major emerging market

economies. The tax elasticity has deteriorated considerably in the past few years.

GST implementation is expected to increase overall tax collection by boosting

economic allocation of various resources (helping to lift GDP growth) and reduce the

incentive to evade taxes (helping to broaden the tax base).

A look at the central government’s tax collection shows that the share of indirect

taxes has increased in the past few years, as economic slowdown has led to a

deceleration in direct tax growth.

Exhibit 26

below shows that the share of direct

taxes has fallen from ~60% of total tax collection in FY10 to 52% in FY16. One could

argue that higher tax rate on fuel products in FY16 helped indirect taxes (or excise

duties) to post one-off high growth; nevertheless, as the exhibit shows, indirect tax

receipts have been increasing their share consistently, making indirect taxes more

important for the central government.

Exhibit 26: Share of indirect taxes has increased…

Direct taxes

Indirect taxes

24.7

9.1

16.9

Exhibit 27: …primarily supported by service tax collections

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Customs

Excise

Services

Indirect taxes comprise customs, excise and service tax

Source: Budget documents, MOSL

Average growth in the past five years (FY12-FY16)

Source: Budget documents, MOSL

In exhibit 27, we look at the three components of indirect taxes – customs duty,

union excise duty and service tax. Service tax collection has grown at the fastest

pace in the past five years. This is what has helped service taxes to increase their

share in total indirect tax collection for the central government – up from 24% in

FY10 to 30% in FY16

(Exhibit 28).

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Exhibit 28: Share of different taxes to total indirect tax collection of the central government

FY10

Services

24%

Services

28%

FY13

Services

30%

FY16

Customs

30%

Customs

34%

Customs

35%

Excise

42%

Excise

37%

Excise

40%

Under GST, the most important thing to note is that the base will widen

considerably. Currently, the central government has an extensive exemption list of

300 items as against 90 for most states. Together, this amounts to a loss of INR3.3t

(or 2.7% of GDP). GST provides a historic opportunity to prune this exemption list.

With GST, many services that are currently tax exempt will come under the tax

bracket. Pruning of the exemption list will help the government to recoup a

substantial portion of the INR3.3t losses. Also, the major high tax items such as

alcohol, tobacco and petroleum products will not be excluded from GST (at least

initially), implying that the loss of revenue from GST implementation will be limited.

Nevertheless, if the government sticks to its idea of implementing a revenue neutral

GST rate, it implies that the effective tax rate will come down. However, with better

tax compliance, reduced tax evasion and pruned exemption list, tax collection will

increase over time.

State governments’ fear of losing tax receipts misplaced

Given all the benefits of GST, it is highly unlikely for governments to lose tax

revenue. However, the focus of the state governments remains on insuring

themselves against possible revenue loss – a myopic behavior, in our view. The

central government has announced a number of other measures to provide comfort

to state governments:



Petroleum products are currently out of the GST ambit and will be included only

at a later date (not decided yet).



State excise duty on alcohol for human consumption and electricity duty on sale

and consumption of electricity will not be subsumed under GST, to begin with.



States may be allowed to levy excise duty or any other tax in addition to GST on

tobacco and tobacco products.



Under GST, unlike the current regime, states will receive a portion of total

service tax collected by the center.



Finally, even after all the factors stated above, if states incur revenue loss, the

center has promised to compensate them for the first five years after GST

implementation. (Till recently, the center’s intent was to give compensation in a

tapering manner – 100% for first three years, 75% in the fourth year and 50% in

the fifth year. However, the states are demanding full compensation or 100%

compensation for the first five years).

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Will inflation rise post GST implementation?

WPI to fall, while CPI is expected to remain largely unchanged…

As far as the impact of GST on inflation is concerned, a moderate GST rate will help reduce

wholesale price index (WPI), while the impact on consumer price index (CPI) will be

limited. However, since services constitute a larger share in the consumption basket than

in CPI, Indian consumers are likely to feel the pinch of higher prices of services after GST is

implemented.



GST will have differential impact on the wider spectrum of goods and services,

as rates for many would change as a result of rationalization. In general, while

primary agricultural goods are likely to stay exempted from GST (or taxed at

lower rate), manufactured goods are likely to become cheaper, leading to a

moderating impact on WPI

(Exhibit 29).

As far as the impact on consumer price index (CPI) is concerned, it is unlikely to

be affected much, since food constitutes for almost half of the basket, and other

items such as real estate and fuel also hold high weightage. Thus, a large part of

CPI will either be exempted or continue to attract the same tax structure as

under the current regime

(Exhibit 30).

Exhibit 30: …while food, fuel & rent have high weight in CPI

Transport,

comm etc,

8.59

Health, 5.89

Education,

4.46

Housing,

10.07

Fuel & light,

6.84

Clothing &

footwear,

6.53

Source: Central Statistics Office (CSO), MOSL

Others,

11.76

Food &

beverages,

45.86

Exhibit 29: WPI is dominated by manufactured items…

Primary

food

articles,

14.34

Primary

non-food

articles,

4.26

Minerals,

1.52

Non-food

manufactur

ed items,

55.0

Fuel &

power,

14.91

Manufactur

ed food,

9.97

Source: Office of Economic Adviser (OEA), MOSL



A recent government study

(Exhibit 31)

says that about half of the CPI basket is

not taxed, another one-third is actually taxed at a lower rate (less than 12.4%)

and less than 20% is taxed at normal (12.4% to 29.4%) to high rate (above

29.4%).

This is one of the key reasons why the average effective rate on consumption as

measured by CPI is 10.4%. Excluding the items with high tax rates (such as

alcohol, petrol, tobacco) and which will be outside the GST coverage, the

effective tax rate drops to 7%.

Further, under the current tax structure, almost 75% of CPI is exempt from

excise, and 47% of the basket is exempt from sales tax (or VAT). The study says

that ~54% of the CPI basket is likely to remain exempted from GST

(Exhibit 32).

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Exhibit 31: Less than 20% of CPI basket is taxed at normal to

high rate…

Normal

(12.4%-

29.4%),

15%

Exhibit 32: …and ~54% of the basket is likely to remain

exempted from GST

High

(29.4%+),

6.7%

75.4%

Zero, 49%

47.3%

47.1%

Low

(<12.4%),

32%

Exempt from excise Exempt from sales Exempt from GST*

tax

Source: Government, MOSL

…however, consumers are likely to feel the pinch



Importantly though, while services comprise a very small share in CPI, they

account for almost 50% of the total consumption basket in the economy

(Exhibit

33).

Thus, while the impact of GST may not be visible in the official inflation

measures, it will certainly pinch Indian consumers, as the share of services has

been rising.

Exhibit 33: Services account for ~47% of Indian consumption basket

Durable goods

Semi-durable goods

Non-durable goods

Services

46.6

46.2

45.9

47.0

42.4

7.9

3.1

2011-12

43.1

7.6

3.1

2012-13

43.0

8.3

2.8

2013-14

41.6

8.7

2.7

2014-15

Source: Government, MOSL



Finally, we have looked at how inflation has behaved in some of the economies

after GST adoption. While the analysis may not hold in strict sense because of

the differential tax structure in the pre-GST regime and different domestic

structure, it is important to note that three of the four economies studied here

witnessed a fall in CPI-based inflation. Nevertheless, this conclusion must be

considered with caution.

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Exhibit 34: Inflation increased in Australia (%)

CPI trend in Australia

Avg inflation in

pre-GST period

was 2.0%

2.7

0.2

0.9

1.4

Avg inflation in

post-GST period

was 3.0%

4.4

3.0

2.8

2.3

2.7

Exhibit 35: In Canada, it decelerated (%)

CPI trend in Canada

Avg inflation in

pre-GST period

was 2.2%

2.4

1.8

2.2

2.0

2.1

0.3

1.8

Avg inflation in

post-GST period

was 1.5%

4.5

4.6

2.7

2.9

1.5

0.9

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exhibit 36: Inflation eased in New Zealand (%)

CPI trend in New Zealand

Avg inflation in

pre-GST period

was 12.1%

13.2

15.5 16.1

7.4

6.1

15.4

15.8

6.4

5.7

6.1

2.6

Avg inflation in

post-GST period

was 7.3%

Exhibit 37: In Singapore, it decelerated (%)

CPI trend in Singapore

Avg inflation in

pre-GST period

post-GST period

3.4

was 2.9%

was 1.0%

3.5

2.3

2.2 2.3

3.1

1.7

1.4

2.0

0.0

-0.3

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

Highlighted bar represents the year of GST implementation

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Source: IMF, MOSL

CPI will be more sensitive to single rate than dual rate structure

As per the government study, a single rate GST will have a bigger impact on CPI

(Exhibit 38).

Assuming the input-tax credit, CPI will increase by 1% if the single rate is

14%. A single rate of 18% will increase CPI by 2.5% (with or without input-tax credit).

A dual rate structure with a lower rate of 12% and standard rate of 18%, implying a

revenue neutral rate of 15-15.5%, will have lower adverse impact on CPI. If all

producers react after adjusting for input tax credit, CPI will be unchanged

(Exhibit

39).

Items such as healthcare (including medicines) and clothing will see higher

inflation; however, others like cereals, fruits and oil & fats will see lower inflation.

Exhibit 38: CPI will be more sensitive to single rate…

Single rate

Single rate with input tax credit

3.4

2.5

1.6

0.7

0.2

-0.2

12%

14%

16%

18%

20%

Source: IMF, MOSL

1.8

2.5

3.3

-0.1

18%

22%

26%

30%

Source: IMF, MOSL

0.3

0.7

0.6

1.3

Exhibit 39: …while dual rate will have limited impact

Dual rate

Dual rate with input tax credit

1.9

-0.5 -0.6

14%

Overall, the impact of GST is likely to be muted on retail inflation, as a large portion

of CPI will remain out of GST coverage.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Will GST accelerate growth?

Seamless and effective implementation holds the key

Approval of the GST constitution bill amendment will be the next trigger for financial

markets though its initial impact on economic activity will only be mildly positive.

Seamless and efficient implementation holds the key.



One of key reasons why GST is expected to boost economic activity is input tax

credit, which is not available under current regime on many transactions. For

example, capital equipment acquired for use in transportation, infrastructure,

distribution, or construction sectors is currently outside the scope of excise

duty; hence, no input tax credits are allowed for union excise duties.

GST could provide for a more seamless and efficient crediting of taxes paid on

capital goods, helping to reduce capital goods prices by 12-14%. Assuming a

negative price elasticity of 0.5%, it implies an increase in demand for capital

goods investment by 6-7%. Since machinery & equipment accounts for one-third

of total investments, it implies an increase in investment by ~2%, which in turn

could add 0.5 percentage points to GDP growth, assuming incremental capital-

output ratio of 4.

The oft quoted NCAER estimate of 0.9-1.7% acceleration in GDP growth is

highlighted as a potential benefit of removal of cascading of exports.

Nevertheless, one of the key assumptions was an exemption-free GST, which

does not seem to be the case now, and thus, the benefit could be lower. As

noted by the RNR Committee, the quantitative impact of the current regime of

zero taxation of exports and that under proposed GST is unclear.

Exhibit 40: GST may usher some accelerators as well as speed breakers to the growth

process

GROWTH ENHANCING



Removal of octroi/entry tax to

ensure smoother transfers

and ensure imports are not

advantaged over domestic

production



Boost to exports by

eliminating negative

protectionism through CST,

CVD and inter-state taxes



Input tax credit to be

extended for capital

equipment acquired for use in

transportation, infrastructure,

distribution, or construction

sectors



Cost of capital goods may

come down leading to higher

investment and growth



GROWTH REDUCING



If GST is not revenue neutral

but revenue accretive for the

government, it would lead to

higher incidence of taxation

on the private sector



A higher tax burden on

smaller players increases the

compliance cost and may

result in loss of activity for the

informal sector



Implementation of less than

ideal GST model would erode

the perceived gain from GST;

specifically GST +/- rate

structure can result in

substantial cascading and

sudden stop of input credit

A reflection on the major changes that may take place in the context of growth

points to some likely gains as well as some speed breakers. While the growth

acceleration would be a consequence of GST implementation, it is not germane

to the process of tax changes.

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

Overall, investment is discouraged to an extent under the current tax regime,

since no input tax credit is provided for several transactions. This increases the

cost of capital goods and thus, reduces investment. If tax credits are provided

efficiently under GST, it may help investments, and thus, GDP growth.

Two key concerns from the proposed GST

There are two key concerns in the proposed GST. Firstly, the 1% additional tax, if

approved, may defeat the entire purpose of creating a unified market. Secondly, the

exclusion of crude oil and petroleum products from GST in the initial period makes us

skeptical of their inclusion later. This is because the central government’s support to

compensate the state governments for revenue loss will expire after five years.



1% additional tax may defeat the objective of adopting GST:

“Implementation

of a comprehensive goods & services tax (GST) is expected, ceteris paribus, to

provide gains in India’s GDP somewhere within a range of 0.9 to 1.7 per cent”,

said a study done almost seven years ago by the National Council of Applied

Economic Research (NCAER), which also figured in the Constitution Bill 2011.

The Bill stated

“…by harmonizing the tax structure across states, this reform

would also lead to the development of a common national market for goods &

services…”

on its very first page. Nevertheless, the clause of an additional 1%,

over and above GST, on inter-state supply (not sale) of goods for two years or

more, defeats the entire purpose of creating a common national market. The

committee headed by the Chief Economic Advisor (CEA) stated in its report

“…The proposed Constitutional Amendment bill provides for a 1 percent duty on

inter-state sales for a limited period. We strongly recommend that this provision

be deleted for the very reason that the CST militates against Make in India…”.

If not now, including crude and petroleum products difficult at later stage also:

The center has assured the states that it will compensate them for revenue loss

arising out of GST implementation for up to five years in a tapering manner

(100% for the first three years, 75% in the fourth year and 50% in the fifth year).

Therefore, there is no need to make exclusions. If states are wary of losing

revenue, for instance, on petroleum products, the center will make good for

them for up to five years. This is an incentive to widen GST coverage to the

maximum extent possible. If petroleum products are excluded from GST initially,

the probability of including them later is even lower because the insurance

period of compensation from the center will expire after (at the most) five

years. So, let’s say, if states decide to allow the inclusion of petroleum products

after three years, they will be eligible for compensation for a maximum of 75%

of losses in the fourth year and 50% in the fifth year. In other words, the more

the time taken, the lower is the probability of making up lost revenue on goods

coming under the GST ambit. In its report, the committee states,

“The

Committee cannot state this in any stronger terms: if the GST is to be a success—

with an uninterrupted value chain that facilitates compliance and a buoyant

source of revenue— these exemptions must be plugged. Using exemptions as

selective industrial policy has led to generous un-selective policy, and

proliferating exemptions. The road to exemptions hell is paved with the good

initial intention of restricting exemptions to a few industries…”

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Key challenges and way forward

Implementation inevitable, but not imminent



The implementation of GST is likely to pose significant challenges. There could be a

multi-year timeline for its final implementation. Not only is the legislative process at

its early stage (constitutional amendment to be followed by at least half the states

ratifying it to be followed by model CGST and SGST bills to be passed by respective

legislatures), the subsequent process would also be elaborate.

First, the proposed GST Council has to give final shape to the contentious design issues

that are yet to be worked out. Second, the ‘place of business’ rules need to be defined

tightly and satisfactorily; these would replace the current definition of taxability in the

case of indirect taxes, both for goods and services. Finally, the background network

and knowledge system involving both the payer and the payee would have to be built.

All these would require an atmosphere of consensus building, which could be a little

more time consuming than is currently being factored in.

Grandfathering of existing location-wise benefits via different modes (such as (a) one-

time settlement, or (b) interest-free loans of amount of tax collected) may adversely

impact operating profits of some companies while increasing their other income.

GST is still in its early stage of implementation and a fairly elaborate preparatory

stage awaits us – both legislative and executive across states. While the

implementation of GST is inevitable, it is not imminent.

Four major steps for GST implementation

FOUR MAJOR

STEPS FOR

IMPLEMENTATION

i) To be done at both Centre & States

Drafting rules

ii) Rules for dispute resolution and

for procedure

advance ruling

for

administering

GST

Drafting Place of Supply

i) To determine location of

Rules

service

GST

July 2016

Model Law for CGST, IGST

and SGST

Has to be passed by respective

legislature

Has to be passed by 50% of the

States in their Legislature after

Source: Government, MOSL

Constitutional Amendment for Centre and

States to tax into each other’s domain

GST | Ushering in a new era - Sparkles and shimmers

GST Council: At the heart of GST implementation



The proposed GST Council is a decision making process that ensures near

consensus for most aspects of GST, which at times may be highly contentious.

The GST Council has its job – that involves critical architecture-related issues –

cut out already.

One of the key challenges of GST implementation would be drafting of places of

supply rules, especially for the services sector. While GST has sorted out the

issues relating to identification of manufacturing and services by clubbing the

two, considerable work and agreement needs to be achieved for identification

of origin and destination of services consumed. A careful drafting could avert a

lot of litigation and transaction costs for corporate India in the future.

Work on other issues relating to IT network design and implementation, staff

training, dispute resolution, and transition issues are still ongoing.

Exhibit 41: GST Council – composition and voting rights

No. of

seats

Members

Vote share

Central Government

Union Finance Minister (Chairperson)

Union Minister of Charge of Revenue/Finance

Minister in Charge of Finance/ Taxation or any other

nominated Minister by each State Government

Andhra Pradesh

Arunachal Pradesh

Assam

Bihar

Chhattisgarh

Goa

Gujarat

Haryana

Himachal Pradesh

Jammu and Kashmir

Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram

Nagaland

Odisha

Punjab

Rajasthan

Sikkim

Tamil Nadu

Telangana

Tripura

Uttar Pradesh

Uttarakhand

West Bengal

33.33%

66.67%

Source: Government, MOSL

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Exhibit 42: GST Council – two-third majority of members present required

Minimum no of states required to vote for the motion for when two central Ministers vote for the motion

Minimum no of states required to vote for the motion for when only two central Ministers vote differently

No. of States present in the meeting

Source: Government, MOSL

Exhibit 43: GST Council has its job cut out

To select a Vice Chairperson of the Council for such period as they may decide

To develop procedure for the functioning of the Council

To decide on taxes to be subsumed

To decide on goods/services to be exempted

Model Goods and Services Tax Laws

Apportionment of IGST

Principles for 'place of supply' rules

Threshold limit of turnover for applicability of GST

Rates including floor rates with bands

Any special rates for specified period

Additional resources during natural calamity or disaster

Special provision for North-east and hilly states

Any other matter that the Council may decide

Date from which petroleum products would be brought under GST

To develop a harmonized market for goods and services

To recommend continuation of 1% additional tax on supply of goods beyond two years

Source: Government, MOSL

Exhibit 44: ‘Place of business’ rules – one of the hardest challenges

Some general challenges



Define location of a business separately for registered and

unregistered business



Claiming of credit by unregistered business



Services related to immovable property



Bifurcating single invoice across multiple states for tax payment



Allocation rules for services involving multiple states with a

Sector specific challenges



Telecom:

Agreement for bandwidth/fibers laid across multiple

states



Multi-location video conferencing



Registration at multiple locations



Ecommerce:

How to decide taxability



Passenger transport:

Place of embarkation, return journey to be

consolidated bill

split



Transfer credit availed by central office on common purchases

(capital, audit, advertisement, etc.) to locations of other states



Stock broking:

Services to FIIs - an export of services



Determining place of supply for works contract involving movable

goods



Insurance companies:

Need registration at all states

Source: Government, MOSL

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Grandfathering of current location-based exemptions

Currently, there are various area-based indirect tax exemptions provided by both

the central and state governments. With the dawn of GST, area-based exemptions

will need to be phased out, as they break the free flow of input credits in the value

chain. Our discussions with various experts suggest that there are three possible

options to mitigate this problem and honor the Doctrine of Promissory Estoppel:

Refund of duty:

Under this scheme, the entity currently exempt from payment

of duty under various schemes will be liable to pay duties as required under the

normal course of business. The duty so additionally paid will be refunded by the

state/central government after assessment. Some states (J&K, northern states)

follow this mechanism and provide refunds. Our discussions with experts

suggest that though this mechanism is the most preferred, corporates may not

find this agreeable, as there could be various complexities in assessment and

additional working capital could be blocked due to delay in receiving refunds.

Upfront payment:

Under this mechanism, the government pays the present

value of estimated duty concessions agreed to the corporates upfront. Going

forward, the entities pay taxes in the normal course of business. However, this

will entail significant amount of cash outflow from the state / central

government upfront, and hence, may be difficult to adopt.

Deferral of payment of taxes:

Under this scheme, the entities eligible for

exemption levy taxation as in the normal course of trade. However, the duty so

collected is retained, as an interest-free tax deferral for a specified period.



We highlight that if option2 or 3 are followed, there could be a decline in the

operating earnings (EBITDA), which may be counterbalanced by increase in non-

operating income and decline in borrowing cost.

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Exhibit 45: Game changing aspects of GST and their impact on different agents

Changes that the GST would usher

Availment of input tax credit for a

wider range of taxes within CGST



Availment of input tax credit for a

wider range of taxes within SGST



Dual power and administration



Corporate



Positive



Impact

Govt. Revenue

•

Centre - Revenue Negative

•

State - Negative

Consumer price



Positive - price



Positive - price

Positive



Eliminate distinction between

goods and services

States to acquire power to tax

service

Place of supply rule



Both positive and negative -

•

This simplifies from multiple

laws for each tax, but then

makes corporates subject to

dual audit and demands



Negative (huge increase in

•

service tax to GST rates, but

benefit in terms of lower

litigation



Negative (dual compliance,

•

audit); registration in all

states for pan India services



Positive - Can check pilferage



Neutral

better, may squabble over

particular issue too

Centre & States - hugely

positive

States - hugely positive



Negative - rise in service

charge



Negative - rise in service

charge



Negative - higher tax,

•

production / relocation cost

Positive - higher revenue on



Positive - benefit of higher

input tax credit may

end price

percolate, promotes

consumption efficiency

Negative - for exporting state



Positive - lower price

governments



Negative - higher price

Positive - higher revenue

Negative - if zero-rated, as all



Neutral for domestic

consumers

input tax is to be refunded

Positive for center; marginally



Negative - higher price from

higher taxation

negative for states with lower

existing threshold

Positive for govt. revenue

Unknown - may continue

Positive - higher revenue

Unknown

Positive- lower dispute and

classification error



Negative - higher price from

higher taxation



Negative - higher price from

higher taxation



Unknown - may continue



Negative - higher price from

higher taxation



Unknown



Neutral

Positive - apart from tax

•

saving an enormous saving in

compliance cost, faster

movement of goods



Introduction of IGST



Mixed/Unknown

•



Exports to be exempt or zero rate as



Potentially positive if zero-

•

at present

rated instead of exempted







Abolition of CST

Lower threshold limit of INR2.5m

for GST

Inter-state movement of goods

currently exempt under Form F



Negative - for smaller

•

corporates, Neutral for bigger

ones

Negative - to be taxable

•





Tax on transfer of goods to branch



Negative - to be taxable

or agents within state

unless BIN no. same

Non-creditable goods that exists at



Unknown - may continue

present



Area/region based exemptions



Negative - likely to go



Stamp duty

HSN based classification of

commodities

Unknown - big relief to real

•

estate if subsumed under GST



Positive - uniform

•

classification to simplify and

lessen dispute





GST registration no. (PAN based



Positive - Easier compliance

BIN) from currently varying practice

and credit claim

of TIN (with or without PAN)

Extensive use of IT network



•

Positive - can effectively track



Neutral

compliance

Positive: Higher buoyancy,

compliance, audit, lower

transaction cost and inter-

state/center disputes

Positive - less disputes and

litigation



Neutral



Positive - easier tax

compliance and refund

•



Sales vs. works contracts

Only 3-4 rates (including zero

rating)



Positive - easier to distinguish

•

Positive - simpler from the

•

plethora of rates prevailing

now but negative - for merit

goods enjoying lower tax now



Positive - reduced tax burden

may lower compliance

Positive - higher revenue and



Positive - tax transparent to

the consumer

easier to administer

July 2016

GST | Ushering in a new era - Sparkles and shimmers

Changes that the GST would usher



Uniformity of rates across states

Impact

Corporate

Govt. Revenue

Consumer price



Positive - makes India a single

•

Positive - easier to



Positive - tax transparent to

market; promotes production

the consumer

administer; negative for

efficiency

states' autonomy to alter tax

rates for exigencies





Higher RNR (likely in 20-22%)

Negative - higher tax burden

•

for the corporates

•

Positive- higher revenue

potential

Positive - gives a tool for

counter-cyclical measures

even within a rule-based

taxation structure

Neutral

Negative - especially for

states that enjoy benefit of

cascading



Negative - higher price from

higher taxation



Positive - provision for tax as

shock absorber remains

GST Council can alter rates if voted



Positive - during downturns

by 75% majority members

for reliefs, negative - during

upcycle

End of price pyramiding

Removal of cascading





Negative - tax change would

•

cease to be a ground for price

change



Positive - may discourage

•

verticalization and encourage

more efficient outsourcing



Positive - stable tax regime

would ensure pricing stability



Positive - lower price

Source: Government, MOSL

July 2016

THEMATIC GALLERY

SECTOR RESEARCH

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GST | Ushering in a new era - Sparkles and shimmers

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