September 2016:
Economy
12 Annual Global Investor Conference
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GST
GST: A game changer for Indian economy
Will actual GST legislation be as flawless as the constitutional bill?
GST (Goods & service tax) is likely to see its legislative birth, as the constitutional
amendment bill enabling both the center and the state governments to levy taxes
on all transactions has been passed by both houses (on August 8, 2016 by upper
house) of the parliament. In a more recent development, as many as 16 states have
ratified the bill. Being a constitutional amendment, GST requires at least half of the
state assemblies to ratify it. As a final step, the government is likely to seek
presidential assent for making this bill a law.
At our Annual Global Investor Conference 2016, we sought the views of Mr Adi
Godrej, Chairman of the Godrej Group, on the likely economic impact of GST
implementation. Besides, we visited Mr Satya Poddar, Partner, Tax Policy Advisor
Group, Ernst & Young during our Delhi Day trip to improve our understanding
further. In this note, we present a summary of their views and also our view on the
likely impact of GST on different sectors.
Mr Adi Godrej’s views
Mr Adi Godrej presented his views on GST at our recently-concluded Annual Global
Investor Conference 2016. According to him:
GST will add 1.5-2% to GDP growth within 1-2 quarters of its implementation.
A standard rate of 18% will be ideal. A standard rate of 22% might harm the
economy.
GST implementation will not only curtail indirect tax evasion but also direct tax
evasion.
The likely negative impact on the unorganized sector will not hurt but improve
employment on national basis.
When states see higher tax revenues after GST implementation, they will be
amenable to the inclusion of petroleum products under GST.
Economic impact of recommended GST:
If GST is implemented as per the Chief
Economic Adviser (CEA), Arvind Subramanian panel’s report, it will benefit the
economy in several ways. Firstly, by removing the net of multiple taxes at multiple
phases of production, GST will help harmonize the production activity in the
economy. The removal of tax considerations in making business decisions – setting
up of warehouses, etc – will increase efficiency in the system. Secondly, the
standard GST rate of 18% is unlikely to be inflationary, as higher prices of services
(currently taxed at ~15%) will most likely be offset by lower taxes on goods
(currently taxed at ~25%). Further, GST will not only help reduce indirect tax
evasion, but will also help to curtail direct tax evasion.
Mr Adi Godrej
Chairman,
Godrej Group
He is the Chairman of a
century-old family
conglomerate, with
operations across the
world. As one of the most
recognizable faces of India
Inc, having led various
industrial associations and
chambers, he commands
respect both in the business
community and in
policymaking circles. An
early-to-bed, early-to-rise
person, he is among the
earliest to arrive at work.
He’s a demanding boss, but
not an unreasonable one.
At 74, his enthusiasm for
work and life is inspiring
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 39825405
September 2016
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

GST | Economy
12 Annual Global Investor Conference
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What if the standard GST rate is 22%?
The lower the standard GST rate, the better
it is for the economy. A standard rate of 22% may do more harm than good to the
economy. Not only will it be more inflationary, but might also scuttle the possible
boost to economic activity.
How long will it take to include excluded items under GST?
The exclusion of
petroleum products, along with alcohol, electricity and real estate reduces the scope
of GST. However, as and when GST is implemented, it is very likely that higher tax
revenues and more efficiency will motivate state governments to bring all exclusions
under GST as soon as possible.
Will the adverse impact on the unorganized sector hurt employment?
There is a
widespread belief that GST will hurt the unorganized sector by bringing them under
the tax ambit and making a substantially large unorganized sector unviable.
However, with improved efficiency, the overall economic activity is likely to get a
boost, which will certainly help employment on a national level.
What is the likely timeline for introducing GST?
Although the government is trying
its best to introduce GST by the targeted April 2017 deadline, it looks difficult. If not
April 2017, GST could be implemented from any moment in 2017; however, it is
desirable to introduce GST from the beginning of a new quarter (July/October).
Mr Satya Poddar’s views
We visited Mr Satya Poddar, Partner, Tax Policy Advisor Group, Ernst & Young
during our Delhi Day trip to improve our understanding of GST further. According to
him:
The approved constitution bill is nearly flawless, but the real GST will depend on
decisions of the GST council comprising of the center and the states.
The economic impact of GST in India will almost entirely be from capital
deepening, as the impact of resource allocation on the economy is unknown. In
Canada, the latter accounted for 75% of the increased GDP post GST.
Unlike the case of VAT, implementation of GST will not be optional for states.
More than a quarter of the current tax base will remain outside the GST ambit,
as per current exclusions.
The lower the GST rate, the better it is for the economy. A quick calculation
indicates that given the current tax base, the revenue neutral rate could be
much lower.
The constitution law is nearly flawless…:
Mr Poddar believes that the government
has passed a nearly flawless constitution bill in the parliament, which allows both
the center and the states to tax goods and services. The removal of an additional tax
of up to 1% on inter-state trade, full harmonization of GST (no option for states to
choose to implement GST or not) are some of the key features of the amendment
bill passed in the Rajya Sabha last month.
Mr Satya Poddar,
Partner, Tax Policy
Advisor Group,
Ernst & Young
September 2016
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GST | Economy
12 Annual Global Investor Conference
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…but will real GST be also flawless?
However, the final GST model will be based on
decisions taken by the GST council (unique to India), which will decide on GST rates,
and also the dispute resolution mechanism. Like Mr Adi Godrej, Mr Poddar also
holds that the lower the GST rate, the better it will be for the economy. The current
bickering over GST rate (18% or 22%) is because states are more concerned about
losing their tax power rather than the economic benefits of GST.
Benefits of GST:
An efficient tax system can help an economy in two ways – by
capital deepening or by better resource allocation. The former implies lower prices
of capital goods, which, assuming negative price elasticity, suggests higher
investment demand, and thus, GDP growth. When GST was implemented in Canada,
GDP increased by some 2 percentage points (pp), of which one-fourth (~0.5pp) was
due to capital deepening and the rest was because of better resource allocation. In
the absence of clarity on the latter in India, it is assumed that the entire GDP gain
will be due to capital deepening.
Impact of exemptions:
An ideal GST would have been a comprehensive GST without
any exemptions, as the exclusion of various items, such as petroleum products,
electricity, alcohol and real estate, from the GST ambit brings uncertainty. These
excluded items account for almost a quarter of the total indirect tax collection.
Whether these items will get included in GST depends on the understanding of
states on the benefits of a comprehensive GST.
Our view: India Inc will be a big beneficiary
GST implementation will bring about a complete overhaul of the current indirect tax
regime. We believe GST will simplify and rationalize taxes, shift trade from the
unorganized to the organized segment and improve efficiency in the system.
The real value of GST will be in the area of tax governance, where a system plagued
with a plethora of discretionary, ad-hoc taxes will move toward a ruled-based,
transparent and stable tax regime. This will make the tax system fairer by ensuring
‘neutrality’ across players, products or services, locations or business cycles.
We believe that four key themes will emerge, which can 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) rejig in supply chain
management.
Click here for our
detailed report on
GST: Ushering in a new era
September 2016
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GST | Economy
12 Annual Global Investor Conference
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Four themes under GST with favorably/adversely impacted companies
AUTO: HMCL, MSIL
MEDIA: HMVL, HTML,
CEMENT: ACC
JAPG, DBCL
MEDIA: DITV
CONSUMERS: TTAN
CONSUMERS: PIDI, APNT, CPBI
AUTO ANCS.: AMRJ, EXID
LIGHT ELECTRICALS: HAVL, CGCEL,
VGRD, SYML
I.
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
If the GST is implemented, as per the Chief Economic Adviser (CEA), Mr Arvind
Subramanian panel’s report:
Sectors/companies likely to emerge as gainers:
(a) Consumer – Pidilite, Asian
Paints, Century Plyboards; (b) Autos – Hero Honda, Maruti Suzuki, Amara Raja
Batteries, Exide Industries; (c) Cement – ACC; (d) Multiplexes – PVR, Inox; (d) Light
Electricals – Havells, Crompton Consumer, Symphony, V-Guard; (e) Media – Dish TV;
(f) Retail – Shoppers Stop; and (g) Logistics – TCI and Gati.
September 2016
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GST | Economy
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Sectors/companies likely to lose:
(a) FMCG – Titan; (b) Media – Print companies:
HMVL, DB Corp, Jagran Prakashan, HT Media; and (c) Automobiles – Ashok Leyland.
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
IT
Media - Pay TV Broadcasters
Textiles
Telecom
Auto - CV


Media - Print Media


Consumers - Cigarette


Highly Negative
:
;
Negative
:

; Slightly Negative
:
; Neutral
:
●;
Slightly Positive
:
;
Positive
:
;
Highly Positive
:

September 2016
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GST | Economy
12 Annual Global Investor Conference
Exhibit 2: Some key beneficiaries from GST
Stocks
Impact

AMRJ/
EXID
th
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.
September 2016
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GST | Economy
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Exhibit 3: Some companies that may suffer an adverse impact
Stocks
HMVL/
HTML/
JAPG/
DBCL
TTAN
AL
Impact
Reasons
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
:

September 2016
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GST | Economy
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Our recent Thematic/Sector reports
NOTES
September 2016
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GST | Economy
12 Annual Global Investor Conference
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NOTES
September 2016
9

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GST | Economy
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For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the
Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
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September 2016
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