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pg 30. INTERVIEW: Atanu Bagchi

pg 32. Indian Economy – Trend indicators

3GROUND ZERO GROUND ZERO 1 - 30 Sep 2014 1 - 30 Sep 2014 2

VOL 1 . ISSUE 9 . 1ST - 30TH SEP 2014

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Engineering, Capital Goods Ankur Sharma, Hrishikesh Bhagat

Infrastructure & IT Services Vibhor Singhal, Varun Vijayan

Metals Dhawal Doshi

Mid-caps Vikram Suryavanshi

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GROUND ZERO - PREVIOUS ISSUES

16th Aug 2014 Issue 8

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1st May 2014 Issue 3


LETTER FROM THE MANAGING DIRECTORIt has been almost 14 years since at least initial talks about

GST implementation started in India and about six years

since official discussions between the centre and states

began. GST is present in 150 countries across the world,

and it is high time India brought its taxation standards up

to international levels. With the NDA government winning

with a resounding majority in the recent national elections,

and with a lot of states under the control of the BJP, the

implementation of GST has now started looking like a dis-

tinct possibility. To implement it in a smooth manner, India

needs an IT superstructure in place and needs to make

the taxation process as smooth as possible to ensure

widespread participation. Above all this, concerns of state

governments need to be mollified and addressed.

While GST, widely known as a consumption tax, is likely

to burden consumers to some extent (at least in the short

term), it is also likely to widen the government’s tax net.

and help the government get its finances in order. It will

also benefit companies to a large extent immediately and

possibly increase their margins....at the very least, it will

ease their tax administration process and will enable them

to make business decisions based on profitability and eco-

nomics and not on how much tax it will have to shell out in

which area - this will eventually benefit the same consum-

ers who have had to shell out a bit extra due to GST.

In short, on the positive side, GST will change the taxation

system in India drastically, it will broaden the tax base

(provided minimum exemptions are given), and it will re-

duce distortions in taxation by switching to the destination

principle. On the negative side, in the short term, it could

burden the consumer and lead to a spurt in inflation.

In our latest issue of Ground Zero, our economist Anjali

Verma will take you on a comprehensive tour of issues sur-

rounding GST in India, experts’ opinions on the subject,

its likely path of implementation, and the pros and cons

that it will bring. Hope you enjoy this very interesting and

informative journey.

Best Wishes

Vineet

4. COVER STORY: GST A Fine Balance

Ground Zero takes an in-depth look at GSP in India, its likely path of implementation and the pros and cons

30. INTERVIEW: Atanu Bagchi

CFO CanFin Homes Ltd

Gaining Momentum

32. Indian Economy – Trend indicators

34. PhillipCapital Coverage Universe: Valuation Summary

CONTENTS


COVER STORY

Indirect tax system in India is still fraught with complexities and a cascading burden for

the industry. Goods and Services Tax (GST) — aims to simplify the tax structure (more

than VAT), eliminate any cascading effect, increase transparency, and boost government’s

tax revenue. The NDA government is serious about implementing GST; many states have

agreed and negotiations are going on with the rest. GST will bring significant gains to

companies (tax credit benefit across the value chain) along with the advantages of a simple

tax structure. GST will facilitate fiscal consolidation because of wider coverage and higher

compliance. The flip side is that taxing consumption – which is the basis of GST – could

dampen demand in case the burden on the consumer proves excessive, at least in the short

term, until competitive forces even things out. The inflationary impact of GST will be based

on the rate. While the form of GST may be debated (minimal exemption will bring in the

best results), its introduction is vital. GST rollout is realistically possible from April 2016.

BY ANJALI VERMA

pg. 6 Why GST and its tax structure VAT to GST – Structure debatable, but its introduction is vital______________________________________________pg.16 Tax experts speak GST introduction is critical even if it’s imperfect______________________________________________pg.22 GST sectoral impact Impact on sectors largely positive______________________________________________pg.25 GST macro impact Positivefortheeconomyandforemployment;short-termnegativeforinflation______________________________________________pg.27 Global GST Structure Well-established globally, a step forward to meet international standards______________________________________________


Why does India need GST so desperately?

India has a very complex, multi-layered and highly

inefficient tax structure, which stems from its fed-

eral structure — the centre and state both charge

multiple taxes at different stages of the supply

chain. A partial solution came in the form of VAT,

but it did not iron out most of the inefficiencies

of the system. GST will alter India’s tax landscape

quite dramatically.

Under GST, all multiple taxes (or most of them at

least) will be merged under one unified tax rate

and the centre and state governments will charge

single tax rate as compared to a host of taxes

charged in the current regime. After the initial hic-

cups, this will simplify tax administration and col-

lection to a huge extent for both the central and

state governments. GST is expected to change

India’s tax structure permanently and for the

better — taxation will switch to the ‘destination

principle’. It will broaden the tax base significantly,

provided minimum exemptions are given. It will

help build a common India-wide market across the

country instead of the state-specific many markets

that exist now and reduce compliance costs. Busi-

nesses will be able to take logical decisions based

on profitability and economics, rather than illogical

ones based on tax concerns.

However, despite all the known positives, GST is

a politically charged subject — states fear losing

their autonomy over taxation and manufacturing

and exporting states fear a loss of revenue. The

immediate tangible result of GST implementation

is likely to be higher prices for consumers, which

may not go down well for obvious reason; it will

VAT to GST – Structure debatable, but its introduction is vital

W H Y G S T A N D I T S T A X S T R U C T U R E

eventually indirectly help the end-consumers

because industries may pass on the benefit with

time and the government may lower direct taxes

as revenues from indirect taxes rise.

When VAT was implemented, there was probably

not a single trade and industry segment that did

not register some kind of protest with the govern-

ment. . The most vociferous protests were from

the trader lobby — more than 100,000 traders

from all over the country converged on the Ramlila

grounds in Delhi (in 2003) to protest the introduc-

tion of VAT. While ostentatiously their reasons for

the protests were the possibility of harassment by

tax inspectors and the need to maintain ‘pucca’

records, which they moaned were ‘cumbersome’

and would lead to harassment, even then, the

real reason was believed to be different — under

VAT they found less scope for tax evasion. GST

will probably fare better as far as the trade and

industry segment is concerned, because unlike

VAT, which only partially solved problems while

sometimes creating fresh ones, GST is actually ex-

pected to make things far easier for the business

community.

“A simplified tax regime through GST will certainly have a positive impact on sectors like pharma, auto, logistics, retail and FMCG. However, liquor and petroleum industries may not benefit in light of their likely exclusion.

Consumers may be benefited as end prices could come down in the long run.”


Year Milestone

1935 Govt of India Act, 1935 made tax on sales of goods a provincial subject

1939 Sales Tax introduced in India in the State of Madras

1941 Sales tax introduced in the State of Punjab

1974 LK Jha Committee suggests VAT

1986 MODVAT introduced in India from 1st of March on select commodities

1991 Chelliah Committee recommends VAT

1994 Introduction of Service tax in India

1999 FMannouncesdecisiontointroduceVATinIndia.

Formation of Empowered Committee on VAT

2002 Task Force on Indirect Taxes report headed by Kelkar.

CENVAT introduced on all commodities at central level

2003 VATintroducedinfirstIndianStateofHaryana

2005 VAT in 24 States/UTs including Punjab, Chandigarh, HP, J&K and Delhi.

2006 VAT implemented in 5 more States including Rajasthan.

2007 FMannouncesGSTintroductioninIndiafromApril01,2010.

VAT implemented in Tamil Nadu & Puducherry.

CentralSalesTax(CST)phaseoutstarts,CSTcutto3%.

Joint Working Group set up for proposing GST roadmap and structure.

2008 VATintroducedinthelastIndianStateofUPfromJanuary01,2008.

CST reduced to 2%

2009 Empowered Committee released First Discussion Paper on GST on 10th Nov.

ReportofTaskForceonGSTof13th FinanceCommissionon15thDec.

Reportof13th FinanceCommission(TFC)submittedon29thDec.

Chronology of Sales tax/VAT/GST reforms in India

Income TaxCorporate TaxEstate DutyWealth Tax

Direct Tax

Excise DutyCustom DutyService TaxSales Tax / VATSTT

Indirect

Tax

Following the success of indirect tax reform in the

form of VAT, the central government is now focused

on introducing another big reform in the form of

GST (Goods and Service tax). GST was proposed in

the FY08 budget and its implementation deadline

was set at April 2010. Stiff resistance erupted from

BJP-ruled states while Congress-ruled states were

in favour. Now that the BJP-led NDA government

is at the centre, GST should see the light of day.

While states are wary of loss of fiscal autonomy and

revenues because of GST implementation, the cen-

tral government believes its introduction will bring

revenue gain, fiscal consolidation, and higher GDP.

Discussions are underway between the centre and

state governments to arrive at a neutral path ensur-

ing gains for the exchequer (centre/states), business-

es, consumers, and the economy as a whole.

VAT was good; GST is the next step

Before VAT was introduced, the tax structure suf-

fered from multiple taxation, a cascading effect, and

varying tax rates across states and commodities.

There existed ten tax rates across the states causing

poor compliance and excessive tax evasion. The shift

from central excise duty to VAT began in the form

of MODVAT (modified VAT) for select commodities.

When this was extended to all commodities it was

termed CENVAT (Central VAT) in 2002-03. Statelev-

el VAT was fully implemented in 2008. Just as GST

is facing resistance now, when VAT was

being implemented, states had resisted

fearing revenue loss and loss of fiscal

autonomy (sales-tax formed the largest

source of revenue for states). It took 10

years from initiating the discussion to full

implementation of state-level VAT — for

GST, it has been 6 years since discussions

have been initiated.

VAT to GST – Structure debatable, but its introduction is vital


Current VAT slabs in India

l 0% for essential commodities (10 items)

l 1% on gold, silver, precious stones (diamonds), and

articles/ornaments

l 4% on industrial inputs, capital merchandise, and com-

modities of mass consumption

l 12.5% on other items

l Variable rates (state-dependent) are applicable for

petroleum products, tobacco, liquor, etc.

VAT exempt category

l Agricultural implements operated manually or driven

by animals

l Aids and implements used by handicapped persons

l Books, periodicals, and journals

l Electric energy

l Fresh milk, pasteurized milk, butter milk, and curd

l Fresh plants, samplings, and fresh flowers

l Fresh vegetables and fruits

l Meat, fish, prawn, and other aquatic products when not

cured, or frozen, eggs, and livestock

l Paddy, rice, wheat, pulses, salt, and flour

l Sugar

l Textile

4-5% VAT rate category

l Agricultural implements not operated manually or

driven by animals

l Communication equipment like PBX or EPABX, etc.

l Intangible goods like patent, copyright, etc.

l Capital goods

l Chemical fertilizers

l Cotton

l Drugs and medicines

l Iron and Steel

l IT products (including hardware, software, telecommu-

nication equipment, etc.)

l Industrial inputs (mainly certain basic chemicals and

minerals)

l Processed meat, fish, vegetables, and fruits

l Sports goods

l Tractors

l Transformers and transmission towers.

“Currently, the tax system drives the business in many ways and not economic efficiency. Cascading impact and no credit setting off between centre and states adds to the cost and inflates prices. Every state has a different law, filing procedures, and tax rates and incentives, influencing businesses. This results in multiple touch points with authorities, cumbersome compliances, and state-specific arbitrage.”

Revenue impact of VAT: Revenue compensation

to states was based on the loss over and above

the agreed loss due to VAT implementation by the

states, distributed monthly. Total compensation

to states for 3-years stood at Rs 132bn (100% of

loss for FY06, 75% of loss for FY07, and 50% for

FY08). Revenue growth of the VAT implementing

states rose from 13.8% in FY06 to 21% in FY07 (as

per government data). Based on a detailed study

of VAT-implementing states, no revenue loss from

indirect tax was found (few major states benefited

along with many minor states) and direct tax revenue

responded positively. However, due to large-scale

tax evasion because of poor administration, benefits

from VAT are limited.

Shortcomings of VAT: Certain taxes (such as sur-

charges, service tax, entertainment tax) are outside

the purview of VAT at the centre and state level,

causing cascading problems. Weak tax administra-

tion by the states leads to tax evasion – limiting the

benefits of VAT. Manufacturers are not able to attain

the benefits from a comprehensive input tax and

service tax set-off.


l Taxes on income other than agriculture in-come.

l Corporation tax.l Custom duties.l Excise duties except on alcoholic liquors and

narcotics not contained in medical or toilet preparation.

l Estate and succession duties other than on agricultural land.

l Taxes on the capital value of assets except agricultural land of individuals and companies.

l Rates of stamp duties – on financial docu-ments.

l Taxes other than stamp duties on transactions in stock exchanges and future markets.

l Taxes on sales or purchases of newspapers and on advertisements therein.

l Taxes on railway freight and fares.l Terminal taxes on goods or passengers carried

by railways sea or air.l Taxes on the sale or purchase of goods in the

course of interstate trade.

l Land revenue.l Taxes on the sale and purchase of goods, except newspapers.l Taxes on agricultural income.l Taxes on land and buildings.l Succession and estate duties on agricultural land.l Excise on alcoholic liquors and narcotics.l Taxes on the entry of goods into a local area.l Taxes on the consumption and sale of electricity.l Taxes on mineral rights (subject to any limitations imposed by

the Parliament).l Taxes on vehicles, animals and boats.l Stamp duties except those on financial documents.l Taxes on goods and passengers carried by board or inland

water – ways.l Taxes on luxuries including entertainments, betting and gam-

bling.l Tolls.l Taxes on professions, trades, callings and employment.l Capitation taxation.l Taxes on advertisements other than those contained in news-

papers.

Centre (Currently)

State(Currently)

In GST, both the cascading effects of CENVAT

and service tax are removed because it provides a

‘set-off’, and a continuous chain of set-off from the

original producer and service provider up to the

retailer is established, which reduces the burden of

all cascading effects. This is the essence of GST, and

this is why GST is not simply VAT plus service tax but

an improvement over the previous system of VAT

and disjointed service tax.

It is believed (not certain) that GST at centre and

state levels will give more relief to industry, trade,

agriculture, and consumers through a more compre-

hensive and wider coverage, higher tax set-offs (for

input and service), inclusion of various taxes in GST,

and phasing out of CST. If implemented with the cal-

ibrated tax rate and adequate state compensations,

GST may bring in higher tax gain for both centre and

states by way of higher coverage (base) and compli-

All about GSTance. Thus, it benefits the state governments, central

government, industry, trade, agriculture participants,

and consumers.

Structure of GST

l Subsuming all state and central goods and ser-

vices tax under GST

l Dual GST model – each transaction will be taxed

by centre and state; tax to be referred as Centre

GST (CGST) and State GST (SGST)

l Tax rate for CGST and SGST is currently aimed

towards revenue neutrality

l Appropriate compensation to states

l Minimalistic exemption list (goods and services)

to ensure maximum benefit; free-flow of tax cred-

it in intra and inter-states

l Uniform tax collection and filing procedures for

SGST and CGST

l Constitutional amendments to introduce CGST

and SGST (possibly two separate laws)

l Seamless IT infrastructure, online tax administra-

tion


Goods and Services Tax model for India: Recommenda-

tions of the Empowered Committee

l Dual GST model – GST should have two components –

one levied by the Centre (referred as Centre GST) and

second levied by the States (referred as State GST).

l Harmonious rate accepted by Centre and State. If need

be, further modification through constitutional amend-

ment.

l Rates for Central GST and State GST would be pre-

scribed appropriately, reflecting revenue considerations

and acceptability.

l Implementation will happen through dual statutes –

defined separately for the Centre and State.

l Basic features like chargeability, definition of taxable

event, definition of taxable person, measure of levy in-

cluding valuation provisions, basis of classification, etc.,

will mostly be uniform for both the Centre and State.

l Centre and State GST will be applicable to all transac-

tions pertaining to goods and services, except for the

exemption list.

l Central and State GST will have to be paid separately

to the Centre and State accounts, as states will have to

be credited back on this basis.

l Both Central and State GST benefit can be drawn sepa-

rately against Central and State GST. Taxes paid against

the centre GST can be utilised as input tax credit for

the payment only against the payment of central GST.

Same principle will be applicable for the state GST.

Although rules for taking the credit from centre and

state will be aligned, the taxpayer will have to maintain

separate accounts for both. Cross-utilisation will not be

allowed except for the inter-state supply of goods and

services.

l Uniform tax collection procedures for Centre and State

GST will be legislated.

l Concurrent jurisdiction for the Centre and State GST

for the entire value chain and all taxpayers.

l Threshold limit is suggested to rise from Rs 0.5mn

annual turnover currently to Rs 1mn under GST, for

goods and services, across all the states. Threshold for

Central GST for goods is suggested at Rs 15mn (same)

and adequately higher for services (current threshold is

Rs 1mn). It is assumed that aggregate total SGST and

CGST would be 20%.

l Floor and ceiling should be set for compounding GST;

floor rate at 0.5% of gross turnover and cut-off limit at

Rs 5mn.

l Filing tax returns periodically to centre and respective

state authorities.

l Each taxpayer would be allotted a PAN-linked taxpay-

er identification number with a total of 13/15 digits.

This would bring the GST PAN-linked system in line

with the prevailing PAN-based system for income tax,

facilitating data exchange and taxpayer compliance.

l Keeping in mind the need of tax payer’s convenience,

functions such as assessment, enforcement, scrutiny,

and audit would be undertaken by the authority which

is collecting the tax, with information sharing between

the Centre and the States.

Key features of GST in India (known so far)

l Tax rate – Undecided as yet

l Coverage – All goods and services, except the

basic exemption list. Currently states have res-

ervations on including alcohol, petroleum, and

entry tax.

l Threshold – Rs 1mn for SGST on goods & servic-

es; Rs 15mn for CGST for goods manufacturers,

adequately higher for service providers

Benefits of GST

l Simplistic tax structure – one tax (GST) in place of

many taxes

l Transparency for consumer and government

l Higher compliance as credit benefit is available

across the supply chain for goods and services

(from producer to retailer)

l Higher revenue generation due to wider cover-

age and greater compliance

l Industry to benefit significantly due to benefit of

setting-off of taxes paid across the supply chain

and tax simplicity

l Prices for the consumer are likely to fall due to

the credit benefit for the industry and services

(tax rate will be the decisive factor)


What is causing the delay? States are a worried lot

Currently, centre collects taxes from 66% of the

resources, and the balance 33% is left for the states.

GST can only be implemented with the consensus of

states and centre as a constitutional change will be

required. Passing the tax law would require two-third

votes in both houses of parliament, plus the support

of 15 of the 29 states to amend the constitution.

Most of the states’ objections to GST revolve around

loss of autonomy and perceived loss of revenue from

petroleum and alcohol.

However, from being wary of introducing GST, many

states have now agreed to accept GST with a few

riders and exemptions. In the UPA government’s

regime, BJP states were against GST. However, with

the NDA government at the centre and more states

also BJP-ruled, the chances of faster GST implemen-

tation are higher. So far, the response from BJP-ruled

l Central excise duty l Additional excise duties l The Excise Duty levied under the Medicinal and Toiletries Preparation Act l Service tax l Additional customs duty (CVD) l Special additional duty of customs (SAD) l Surchargesl Cesses

l VAT/Sales tax l Entertainment tax l Luxury tax l Taxes on lottery l Betting, & gambling l State cesses & surcharges l Entry tax not in lieu of octroi (inclusion undecided)l Purchase tax (inclusion still undecided)

Central Taxes

State Taxes

states (like Rajasthan, MP) is not full acceptance but

conditional acceptance. SP-ruled UP has mildly loos-

ened its stringent position against GST.

Experts believe that most of the state and centre

taxes should be subsumed under GST to ensure sim-

plicity, compliance, revenue generation, and benefit

of all tax-paying agents.

Benefits to states

The GST at the state-level is justified because:

l States get the additional power of levying service

tax

l System of comprehensive set-off relief, including

set-off for cascading burden of CENVAT and

service taxes

l Subsuming of several taxes in the GST

l Removal of burden of CST (CST has been re-

duced to 2% and will be abolished once GST is

introduced).

Taxes to be subsumed in GST


Treatment of various taxes (as per Empowered

Committee)

Tobacco products: It will be brought under GST with

Input Tax Credit. Centre may be allowed to levy excise

duty on tobacco products over and above GST without

ITC.

Services: Both centre and states will have powers to tax

services vs. the current structure where only the centre

levies service tax. For states, the principle for taxation

of intra-state and inter-state has already been formulat-

ed by the Working Group. For inter-state transactions,

integrated GST (IGST) will be adopted by appropriately

aligning and integrating CGST and SGST.

Integrated GST (IGST) would be levied by the centre,

which would be a combination of Centre GST and State

GST on all inter-state transactions of goods & services.

The inter-state seller will pay IGST on value addition

after adjusting available credit of IGST, CGST, and SGST

on his purchases. The exporting state will transfer to

the Centre the credit of SGST used in payment of IGST.

The importing dealer will claim credit of IGST while

discharging his output tax liability in his own state. The

centre will transfer to the importing state the credit of

IGST used in payment of SGST.

Exports: Exports would be zero-rated and similar bene-

fits will be given to SEZs (limited to processing and not

to sale from an SEZ to Domestic Tariff Area (DTA)).

Imports: Both CGST and SGST will be levied on

imports of goods and services post necessary consti-

tutional amendments. The incidence of tax will follow

the destination principle and the tax revenue in case of

SGST will accrue to the state where the imported goods

and services are consumed. Full and complete set-off

will be available on the GST paid on import on goods

and services.

Special Industrial Area Scheme: It has been decided

that industrial benefits/incentives should be given in

cash once GST is implemented. This is aimed at not

disturbing the continuous chain of set-offs against GST.

Current benefits will be allowed to continue until the

expiration of the scheme for both centre and states. Any

new exemption/remission etc. will not be allowed, ben-

efits will have to flow in the form of cash after receiving

GST.

The state’s list of concerns include

l Loss of revenue and fiscal autonomy: Industrial

states like Gujarat, Maharashtra, and Tamil Nadu

receive 77-80% of revenue receipts from their

own taxes while it is at 27-28% for states such as

Bihar and J&K (rest of the revenue comes from

centre allocations). Total losses to all the states

are estimated by the National Institute of Public

Finance and Policy (NIPFP) at Rs 320bn, based

on calculations taking 2007-08 as the base year.

On the other hand, the task force under the 13th

Finance Commission has suggested a provision

of Rs 500bn as compensation for 5 years.

l Quantum and timing of compensation from

centre: The Empowered Committee has recom-

mended that adequate compensation should

be provided to states for the loss that might

emerge due to GST implementation for the next

five years released as special grants to the states

every month on the basis of a neutrally moni-

tored mechanism.

l Producing states at loss: GST is a consump-

tion-based tax and not origin based. Under GST

structure, the tax would be collected by the

states where the goods or services are actually

consumed i.e., where the goods are actually sold

and not the state where it is actually originated.

Hence, losses could be heavy for producing

states. States (Gujarat, MP) that were focused

on manufacturing developed huge infrastructure

and will suffer. However, the centre believes that

there is no evidence yet that exporting states will

suffer.

l The rate of GST

l Entry tax, alcohol, and petroleum goods should

not be subsumed in GST. States are being

convinced and the possibilities of allowing states

to levy additional taxes (over and above SGST)

in lieu of entry tax, petroleum products, and

alcohol, are being considered.

l States demand legal control of central GST up to

a limit of Rs 15mn — centre is willing to give only

administrative control. States are worried that

their small businesses will fall under centre GST.

Dual-control is prescribed and accepted above

Rs 15mn.

l Control over small traders in the new tax regime.


Treatment of alcohol: Close to 20% of the states’

revenue is generated from alcohol; it is the sec-

ond-largest source of revenue for states after sales

tax – and the reason states are wary of letting go

of alcohol taxation to GST. Alcohol consumption is

barred in Gujarat, Nagaland, Mizoram, and Manipur.

For Tamil Nadu, 27% of the revenue came from alco-

hol in FY13 and for Kerala, it stood at 22%. Alcohol

is subject to multiple taxes under the current regime

— central excise and state VAT on manufacture and

production, sales tax, entry tax, and octroi on sale/

movement of goods.

The central government is in favour of including

alcohol under GST for the following reasons

l To avoid cascading effect – Tax cascading has

adverse impact on volumes, prices, and growth

of the sector and resultant lower revenue genera-

tion

l If alcohol industry is kept out of GST, impact of

CGST and SGST on inputs and services for which

no credit is given will have adverse impact on

the margins and result in higher prices. Inclusion

will facilitate free flow of credits across the value

One expert that we spoke with was of the view that GST will be implemented without including petroleum and alcohol; states will agree for entry-tax inclusion – Not a perfect GST

Issues of different states:

Uttar Pradesh: Threshold limits, tax-free goods, tax rates,

dual control, place of supply rules and revenue-neutral

rates. Crude, high-speed diesel, petrol, natural gas and

aviation turbine fuel within the purview of the levy. UP has

demanded that light diesel oil, furnace oil, residual furnace

oil and tobacco and tobacco products should also be kept

out of GST.

Rajasthan: Has demanded that petroleum should be as

a state subject, clarity on tax transactions when goods

are transported from one state to another, merging entry

tax into VAT, seek right to levy additional VAT on tobacco

products, and that right to levy entertainment tax for local

bodies should rest with the state administration.

Madhya Pradesh: Alcohol and petroleum should be

exempted, timely compensation by the centre. After a

meeting on 20th August MP has fully favoured the GST

implementation.

Karnataka, Tamil Nadu, and Kerala: These states are

hubs for manufacturing, services, and technology and

stand to lose the most if the government bans them from

collecting local taxes without offering a substitute. In fact,

in a presentation to the union finance minister, Tamil Na-

du’s finance minister, O Panneerselvam, had made it clear

that he was concerned about the impact of the proposed

GST council on the fiscal autonomy of states and the huge

permanent revenue loss it is likely to cause to Tamil Nadu,

which is a net exporter with a large manufacturing industry.

West Bengal: WB finance minister Amit Mitra had said

that while his party supports GST, there were concerns

about compensation. He was recently quoted saying the

Centre told the state (WB) that it will not be given Rs 36bn

(in lieu of CST being reduced from 2011-12) as compensa-

tion to be able to move towards GST. He had said that his

government ‘lacks confidence’ about the centre’s assur-

ance on this issue.

chain. GST will provide credit on inputs and input

services

l Exclusion will make tax administration of the

industry too complex and costly for the govern-

ment

l Exclusion will have adverse impact on trade part-

ners (restaurants, transporters, stockists, distrib-

utors) and other industries (pharma and perfume

manufacturers as alcohol used as raw material)

l Inclusion will lead to better competitiveness in

domestic and international markets: No sticking

costs

In India, it is being recommended that centre should

apportion CGST collections on alcohol with states

and SGST should be adjusted to ensure revenue

neutrality.


Internationally, alcoholic beverages are taxable at

two levels

l VAT / GST (as the case may be) – levied on mov-

able goods and services (with few exceptions)

l Excise duty (non-recoverable) – levied only on

specific goods.

l VAT / GST paid on inputs can be off-set in the

hands of registered manufacturers

Treatment of petroleum products: Out of the total

indirect tax collections of the centre, approximately

23% came from petroleum taxes in FY14. For states

it stood approximately at 10-12%.

Current tax treatment of petroleum products

l To central government: through customs duties,

cess on crude oil, excise duty and service tax

charged on input of services.

l To state government: through sales tax/ VAT and

central sales tax

l In addition to central and state taxes, octroi and

entry tax are revenues that accrue to local bod-

ies.

Problems with the current regime and exclusion from

GST will result in:

l Cascading of taxes, which will have price impact

on other sectors; this is because petroleum is a

key input for various industries (railway, water,

airways, fertiliser)

l Making exports of petroleum products uncom-

petitive

l Impact revenue collection

A study done by NIPFP has shown that GST imple-

mentation will either lead to prices of petroleum

goods remaining unchanged or declining (except

for tax exempted sectors). These results suggest

that there is little reason for leaving out petroleum

products from GST.

Entry tax is a tax imposed on the movement of

goods from one state to another — it is levied by

the recipient state to protect its tax base. It’s a tiny

tax but amounts to huge complexities in compliance

and also results in discrimination of goods. This tax

was earlier levied by local civic bodies on mere entry

of goods into its local area and collected in cash at

check-posts by the road side. There was no mech-

anism for collecting the tax on trains or air cargo.

Given the inefficiencies of collecting it at the entry

point, the tax is now levied on the basis of informa-

tion in the accounts of the dealers.

The entry tax is an impediment to free flow of trade

and is a source of competitive distortions and inef-

ficiencies in the supply chain. Gujarat has already

eliminated entry tax by increasing its VAT. Entry

tax has been held unconstitutional by various high

courts across the country.

To address the concerns of states on revenue loss on

account of entry tax, it is being suggested that states

may be allowed to levy additional 0.5-1% rate over

and above the state GST. This amount could then be

transferred to their local municipalities.

States have agreed on

l Threshold levels for GST implementation at Rs

1mn (Rs 0.5mn for special-category states).

l Harmonise the exemption lists of states and the

centre, which has 96 and 243 items, respectively.

l MP and Gujarat have agreed to favour GST

while congress-ruled Haryana has hardened its

negative stance (pertaining to purchase tax as

the state gets Rs 40-50bn from agriculture). Tamil

Nadu stayed with its stance of fiscal autonomy of

states.

If petroleum is out, it’s not GST: Parthasarathi Shome


The empowered committee has decided to adopt

a two-structure approach in implementing GST —

lower rate for necessary items and a standard rate

for goods in general. Special rate will be set for

precious metals and a list of exempted items. Deci-

sion on current exemption list under VAT (to remain

exempted for an initial few years) is yet to be taken.

Similar decisions are to be taken for the exemption

list for the Centre GST. For services, a single rate is

advised for both Centre GST and State GST.

As of now, the government has not shared its

thoughts on the tax rate of GST; experts’ opinions

vary from a rate of 16% to as high as 24%. Experts

have stated that a single rate for goods and services

will be preferred. GST rate for state and centre is

not crucial for the industries and consumers. A few

government officials have stated that the two rates

being considered are 8-10% for the lower slab and

16-18% for the higher slab. In addition, states can

levy a 1% additional tax on precious metals and a list

of exempted items.

Globally, GST rates vary from 5-27%; Singapore,

Canada – 5%, OECD average – 19%, and Hunga-

ry – 27%. World average GST rate stands at 15.9%,

lower than 21.2% for 27 EU countries and 19% for

34 OECD countries. The GST rate set by the rapidly

growing economies (suitable category for India) is

lower at 12.7%. Of the 25 RGMs, 11 apply rates of

15% or more (Argentina, Chile, China, Colombia,

Czech Republic, Ghana, Mexico, Poland, Russia, Tur-

key and Ukraine), and although no RGM rate reaches

the heights of 27% (the world’s highest VAT rate,

which is charged in Hungary) four RGMs do charge

rates at or above 20%.

The government hopes to table the constitution

amendment bill in the winter session of parliament

after it agreed to address some of the concerns

including the non-payment of central sales tax

compensation (CST) and issues surrounding the

GST’s design. Since the government will need a

2/3rd majority, and considering that getting to a GST

consensus is expected to take longer, GST introduc-

tion is unlikely to happen in April 2015 as suggested

in the budget. A few tax experts that we spoke with

are of the view that considering the current pace

of negotiations with the states and requirement of

constitutional amendment, GST implementation

is possible in April 2016. Others feared that if it is

introduced in April 2015, industries are not prepared

to implement it.

Average VAT/GST rates in 2013

GST Rate Structure for India

Current Status

“Industry should be given sufficient time to structure their systems and accounts for GST — 6-9 months of preparation time should be given to corporate. As of now, very little information is available with the industry participants about GST tax rate, filing procedures, etc. “


GST introduction is critical even if it’s imperfect

T A X E X P E R T S S P E A K

Mr. Govind Goyal from the chartered account-

ancy firm, Govind Goyal & Co., says that GST

will bring in significant benefits for the country,

businesses, as well as consumers. If the constitu-

tional amendment and white paper are cleared by

April 2015, GST implementation is likely by March

2016. Even when GST comes in, a few differential

tax rates are expected to exist (in line with the

current exemption and necessary commodity list).

He believes that SGST and CGST should not be

higher than 15%.

Positives:

l States offering large base of services will bene-

fit hugely.

l Consumer – benefits from transparency in tax

payment — will be able to choose amongst

the goods where tax levy is lower.

l Industry – GST will be the only one tax to

comply with; this will simplify tax payment and

administration for companies.

l Government – revenues will rise as tax base

will widen and leakage on taxation will reduce

substantially. Black economy will translate to

white economy.

l Cost efficiency will make Indian exports more

competitive.

Concerns:

l Government has not analysed the impact of

GST on trade and industry — their perspective

needs to be understood before implementa-

tion.

l Dual structure is a problem as CGST credit

may not be set-off against transaction all over

India while SGST credit can be utilised all over

India. Single-rate GST would have been the

preferable choice — revenues could be shared

between centre and states. States do not want

to let go off taxation powers.

l No significant study has been done on the

appropriate GST rate for India.

l Administration of GST at state and centre level

will be tedious for the taxpayer (for example,

same invoice will have to be shown to state

and centre authorities for credit purpose).

Clarity needed:

l Treatment of sectors and threshold exempted

currently

l Treatment of the Special Economic Zones

l Availability of CGST credit on purchase of

goods inter-state

l Manner in which IGST credit will be made

available to the taxpayer

l Place of supply rule should be clearly defined –

there is no clarity on the treatment of move-

ment of services and its credit benefit across

states

Advice to the government:

l Threshold limit of Rs 1mn will bring in smaller

businesses under the tax ambit. Considering

higher inflation and income levels at the cur-

rent juncture, many uneducated and unin-

formed businessmen will fall in this category.

Government will have to provide education

and extremely simplistic IT infrastructure for the

understanding of this category. Higher thresh-

old in the beginning could be considered and

lower threshold should be brought under tax

net, but not included under GST. This will give

smaller businesses time to prepare.

l One law should be made for GST within which

different taxation rates for CGST, SGST, and

IGST can exist. In line with CST, GST can be

collected by the centre and distributed to

states.

l No additional compensation should be given

to the states as GST will bring in sufficient

gains for the states.


l Administration of CGST and SGST should be

done at one place/office.

l Government should ensure that a purchaser is

able to get credit on the credit issued by the

supplier, irrespective of issues with the supplier

in other taxation contexts.

l Certain services come along with goods; these

should be merged as one.

l At the initial stage of implementation, govern-

ment should administer the inflation burden on

the consumer, as businesses may enjoy much

higher margins and profitability and the entire

burden may be passed on to the consumer. With

time, market forces and competition will find

equilibrium and prices will decline.

Mr. Lakshmikumaran, founder of Lakshmikumaran

& Sridharan (L&S), an Indian law firm specialising

in the areas of international trade, taxation, intel-

lectual property and corporate laws, believes that

industry should be given sufficient time to structure

their systems and accounts for GST — 6-9 months

of preparation time should be given to corporate.

As of now, very little information is available with

the industry participants about GST tax rate, filing

procedures, etc. GST benefits will be compromised

if petrol, alcohol, tobacco, and real estate are kept

outside its purview. Past experience with VAT intro-

duction and implementation has been sour. Interna-

tionally, countries have given two years of time for

implementation.

However, GST should be introduced in any form as

it brings a host of other advantages for the indus-

tries. It can be enhanced with time and experience.

Government’s intention is to introduce it by April

2015. If implemented as intended, states may give a

few months’ temporary exemption to industries from

complying, to ensure adequate preparation.

GST should be introduced faster; DTC can still

wait. GST is the best nutrition for the economy, he

feels. It will be a step away from the existing archaic

laws, will reduce incidence of tax evasion, and tax

litigations will drop. The most important benefit for

industries is from tax set-off along the entire supply

chain.

Consumer will be impacted in the short-term, while

government revenues should remain neutral to

higher. It is advised that the draft legislation should

be put in the public domain for their comments and

at least 6 months should be given for preparation.

Goods and services should be charged at the same

rate. Variation between the CGST and SGST will not

impact the end-consumer.

Pratik Jain, tax partner, KPMG India, expects GST

to be implemented by April 2016. He says GST will

address wide-ranging issues with the current indirect

tax structure. Currently, the tax system drives the

business in many ways and not economic efficiency.

Cascading impact and no credit setting off between

centre and states adds to the cost and inflates pric-

es. Every state has a different law, filing procedures,

and tax rates and incentives, influencing businesses.

This results in multiple touch points with authori-

ties, cumbersome compliances, and state-specific

arbitrage.

GST is internationally recognised in most developed

countries with the only exception of United States.

As per our constitution, dual structure is feasible and

suitable. SGST is designed to go to the consumption

state – this resolves the problem of inter-state restric-

tions being faced in the current structure.

States are worried about losing fiscal autonomy (as

GST council will decide the tax rate, products, etc.)

and insufficient compensation (producing states will

suffer more). More traders will fall under GST. Mr.

Jain believes that the central government may agree

to states’ demand for petroleum and alcohol exclu-

sion from GST (out of demands to exclude petrole-

um goods, alcohol and entry tax).

GST will be a significant reform, but may not be a

perfect one. Exclusion of petroleum goods will mean

that approximately one-third of the economy will be

out of GST. There is no clarity on tax rate yet; howev-

er, expected GST rate is likely to be revenue neutral,

considering the benefit of credit offset and services

under GST.

In the short-term, GST may be inflationary — gain

from offsets on input for the manufacturer is likely

to be passed on to consumers when more clarity

emerges. If it is not implemented in the next 1-2


years, then GST may be delayed, as the government

may not be comfortable introducing GST towards

the end of its regime — history has shown that

governments that have introduced GST have not

returned to power.

A tax expert with a renowned FMCG company

says that GST will streamline the current tax struc-

ture. Impact on the FMCG industry will depend on

the tax rate. As of now, it is believed that GST could

be introduced at a rate of 16-18%. At 18%, there is

no benefit or loss for the company. However, cur-

rently, packaged food is taxed at a lower rate of sub-

5% — under GST this rate will be revised upward to

the introduced GST band (16-18%), which is a big

concern for the industry. This will have an inflationary

impact. Personal care goods could benefit at 16%

GST; at 18% it will breakeven. Distribution and com-

pliance will streamline.

Mr. MS Vasan, a senior tax professional says GST

is still at a nascent stage. With 29 states, 2 union

territories, plus centre — 32 independent countries

within one unified country (in his opinion) to share

VAT revenues — is an uphill task.

l GST will bring tax rate rationalisation for all

goods and services, he feels

l Compensation should be provided for lesser

revenue-earning states, as consumption states

will earn higher revenue — e.g., manufacture in

Gujarat but consumed in Delhi (cars)

l An equilibrium should be created among state

taxes, share of taxes, and compensation for

shortfall

Central GST, state GST and inter-state transfers

will have to be tracked, recorded, and assessed.

GST should be implemented flawlessly without

any baggage of VAT shortfalls and imbalances. Tax

reforms, IT infrastructure and simplified procedure

should go hand in hand for the success of GST. The

government will probably be equipped to handle

this upgraded version of tax reform by 2016.

The expected rate of 16-20% will be better for the

automobile industry vs. the current rate of 24-28%.

Also, currently, there is no input tax credit set-off

benefit for the industry across the supply chain. GST

tax rate is not an issue as long as it remains vatable.

The entire chain of distribution will become more

transparent. VAT suffered with implementation vary-

ing from the white paper recommendations causing

confusion for the taxpayers, thus care should be

taken to ensure that GST implementation is in line

with the recommendations, ensuring transparency.

Consistency and transparency is the key for GST

reform. GST should be levied across the value chain

and there should be minimum exemptions. End

consumer will be burdened if the product is in the

monopolistic segment. If the segment is regulated in

terms of price, customer will not be impacted. Com-

panies will benefit as credit set-off across the chain

will add to margins. GST imposition will cut down

the freebies that are being given (on cars) currently.

A large Maruti dealer says that GST implementation

will be a huge positive for the sector. Currently, the

tax system is fraught with inter-state complications

in taxation methods even if the VAT rate is the same.

The stock distribution of cars is an expensive affair

as warehouses are set on the basis of tax benefit

rather than economic gains. It takes about 6-7-days

for a car delivery from Maruti’s Gurgaon warehouse

to Mumbai (in Maharashtra). With the advent of GST,

the number of days can reduce to a single day as

stockyard/stocks will be located at a few centralised

places. Maruti already has a few regional stockyards

and regional parts distributions centres but would

be able to dramatically increase the number if GST

is implemented. Currently, Maruti’s regional parts

distribution centres can stock up to 30% of the

range of spare parts due to taxation norms. With

GST implementation, it will rise to 80% of the range

of spare parts, thus hastening the supply of spare

parts. As of now, there is no clarity on octroi and

LBT — these two set of taxes add significantly to the

administrative complexities.

Tax rate of GST will not be a concern for the sector

as set-off benefits will be provided for the manufac-

turer and service provider. However, the customer

may be burdened if it is steep. A rise of 1-2% or

slightly more along with the abolition of octroi and

LBT should be acceptable to the consumer. A higher

rate will adversely impact demand, as the burden of

higher tax rate will have to be borne by the consum-

er.


Mr. Dinesh Maheshwari, tax expert at Future

Group, is gung-ho about GST. Currently, the

company has warehouses spread across the coun-

try in order to avoid inter-state transfer taxes. If all

the taxes (like octroi, entry tax, CST) are subsumed

in GST, the company will focus on consolidating

warehouses, which will add to cost efficiency (3-4%

cost reduction expected on this front). Input tax

credit will be available on capex under GST — this

will add to savings of 20% of the capex amount.

Service tax credit will also be available under GST,

adding 7-8% to cost savings. Services form a big

portion of expense for the retail sector in the form of

Q&A with GST expert at Taxsutra

1) Your views on the currently advised GST structure?

GST, which is intended to totally revamp the manner of

indirect taxation, is definitely the most awaited reform.

Though GST is a welcome step (all taxes will become a

pass through), the success of GST lies in its smooth im-

plementation. GST proposes to replace all indirect taxes

being levied on goods and services by the Indian central

and state governments in the form of Central GST and

State GST, respectively. The proposed GST will be a further

improvement over VAT, hence a study of the manner and

shortcomings faced while implementing VAT can be useful.

Considering India’s federal polity, implementation of dual

GST structure is an apt tax reform, which safeguards states’

as well as centre’s revenue (albeit with a temporary loss to

the state exchequers). From a manufacturer’s standpoint,

this will definitely help reduce the cascading effect of

various taxes that are levied throughout the manufacturing

process.

Consensus among stakeholders is the key to implementing

GST. However, the government should ensure that there

are not too many exceptions from the GST framework.

2) We understand that the government is in favour of

introducing dual GST? Its benefits and negatives?

Benefits of GST:

l Simplified tax structure, broadened tax base, reduction

in number of taxes applicable and phasing out of Cen-

tral Sales Tax on interstate transactions

l Will remove cascading effect; hence, it will provide

more relief to industry, trade and agriculture by provid-

rent, housekeeping, legal and professional services,

etc. He does not expect credit benefit to come from

electricity and petroleum products as these are likely

to remain out of GST ambit. Simplistic structure and

lesser warehouses will add to savings.

Consumer will be burdened somewhat as prices

of some of the commodities will rise in the range

of 5-10% (90% of the segments will not record any

price rise), he believes. GST tax rate expectation is

at 17-20%. Corporate and business consumers will

shift to organised sector as credit can be claimed

against the expenses.

ing a more comprehensive and wider coverage of input

tax set-off

l Will reduce compliance cost by providing uniformity in

procedures

l It is a destination-based tax — which is in line with pro-

posed OECD guidelines on VAT/GST for international

trade

l Uniform tax rates across states will ensure that tax

arbitrage is not a guiding factor in the business set-up/

supply chain management

l Will help build a transparent and corruption-free ad-

ministration

l Increase competitiveness of Indian goods and services

in international market and thus, boost exports

Negatives:

l State to lose autonomy over taxation of certain

products (e.g., alcohol) and resultant loss to the state

exchequer

l Administration may be an issue, especially in case of

interstate transactions - tax authorities would require

thorough knowledge of the new law (this is addressable

through training)

l Implementation hassles in view of lack of clarity over

GST legislation would hamper the transition for tax

payers (addressable through coordinated approach in

implementation)

3) What is the GST rate that government may introduce

for state GST and centre GST? What could the cumula-

tive GST rate be? How will these rates compare with

the existing VAT and centre tax structure.

Presently, under the multiple indirect tax laws, excise


ranges from 8.24% to 12.36%; service tax is 12.36%; VAT

ranges anywhere between 4% to 20%; aggregate customs

duty falls between 24% and 28%. These are broad rates

and exact rates would depend upon product and other

factors.

The combined GST rate is expected to be below 20%. The

Empowered Committee has decided to adopt a two-rate

structure – a lower rate for necessary items and items of

basic importance and a standard rate for goods in general.

There will also be a special rate for precious metals and a

list of exempted items.

4) What will be the impact on tax collections for the

centre and states?

Increase in tax base will definitely see a rise in revenue

collection for the centre. For states, there could be a short-

term revenue loss, but over time, the revenue productivity

should increase due to better tax compliance and in-

creased productivity of the economy.

5) What are the issues that states have due to which

they are wary of introducing GST? Do you concur with

their concerns?

Some states are apprehensive about surrendering their

taxation jurisdiction, while some want to be adequately

compensated. To an extent, this seems justified since the

states have not been entirely compensated for revenue

loss arising from reduction in Central Sales Tax since 2010.

At present, states derive about 35-40% of their sales tax

collections from petroleum products and alcohol. Haryana

gets Rs 40-50bn from purchase tax on food grains. They

are likely to lose a major chunk of the revenue if these

products are brought within the scope of GST.

Some Union government officials have insisted on giving

only administrative control to states, whereas states have

unanimously recommended grant of legal powers. This

may create a significant eco-political inter-dependency.

6) What will be the impact on business and sectors?

The current indirect taxation regime does not fully address

the issue of cascading effect of taxes already paid at earlier

stages as there are several other taxes, which both the

central government and the state government levy on pro-

duction, manufacturing, and distribution, where no set-off

is available in the form of input tax credit. These taxes add

to the cost of goods and services through “tax on tax”,

which the final consumer has to bear. Such cascading effect

of taxes will get removed with the introduction of GST with

a continuous chain of set-off from the stage of manufactur-

ing to the retailer’s stage. Thus, the overall cost of goods is

likely to come down under the GST regime. Lower prices

will lead to more consumption, which will have a positive

impact on businesses. Also, the overall compliance cost for

an entity will reduce in GST, which will increase the bottom-

line.

7) Which sectors will be positively influenced and which

will have negative impact?

Currently, almost every sector is marred by multiplicity of

taxes and the cascading effect across the chain. A simpli-

fied tax regime through GST will certainly have a positive

impact on sectors like pharma, auto, logistics, retail and

FMCG. However, liquor and petroleum industries may not

benefit in light of their likely exclusion.

8) Impact on the end-consumer? What will be the

impact on end-prices? Will the burden largely fall on

the end-consumer? Which commodities can see higher

prices?

In the GST system, both central and state taxes will be

collected at the point of sale. This will benefit individuals

as end prices could come down. Lower prices will lead to

more consumption, thereby helping companies.

9) When is the GST likely to be introduced? Howwell

prepared is the corp orate sector for it?

The new government’s election agenda as well as its first

budget speech emphasized GST. However, considering

that substantial work is still left to be completed, it does

not seem feasible to implement GST from April 2015.

While the corporate sector would be eagerly awaiting/

seeking speedy implementation of GST, it is necessary that

GST law and rules first need to be released by the govern-

ment. Thereafter, the government as well as businesses will

require reasonable time to implement GST. It will require

significant support from a good information technology

platform.

10) Which taxes (state or local bodies) will be left out-

side the purview of GST?

Basic customs duty and cess thereon, LBT, octroi, entry tax

in lieu of octroi, stamp duty, VAT on alcoholic beverages

(subject to state discussion) and excise duty on tobacco


could be left outside the purview of GST.

11) Which commodities and services are expected in the

exclusion list?

Alcoholic beverages, petroleum products, and tobacco are

expected to be out of the GST net. If this happens, it may

not be an ideal GST and hence the government should

strive to bring more products into the GST framework.

Deloitte Survey – survey done across industries

and cities

l 70% of the respondent positive about GST, 28%

unsure (possibly due to poor awareness)

l Suitability of dual GST in India – 60% of the re-

spondents feel dual GST system is suitable, 23%

disagree and 17% are unsure.

l Tax rate – 12% rate seems to be most appropri-

ate for the respondents

l GST on petroleum goods – 75% agree, 25%

disagree

l Most of the respondents agree that GST will

eliminate the cascading effect of taxes

l 75% of the respondents agree that tax credit will

be simpler in the GST regime

l Over 60% of the respondents across sectors feel

that business model change will be necessary

l Transition from current tax structure to GST

regime should be given around 9-12months

l Respondents from manufacturing and services

are unsure about GST impact on cost and price

of product. Trading sector participants believe

that cost will fall.

l Training current staff and appointing professional

advisors seems to be the approach

CII-KPMG Survey

l 88% of the respondents prefer a single GST

enactment (both for centre and states)

l 77% of the respondent would prefer to have one

single rate for CGST and SGST

l 86% of the respondent would prefer to have a

cumulative standard rate between 14-16%

l 61% of the respondent prefer that exempted

services be notified instead of taxable service

like the norm internationally

l 45% of the respondents believe that their busi-

ness will be impacted due to taxation of stock

transfers

l 44% of the businesses may consider consoli-

dating their business operations

l 55% of the respondents have not analysed the

price impact of GST on goods and services

l 84% of the respondents feel that input tax

credit benefit will have a positive impact on

their profitability

l 46% of the respondents feel that higher work-

ing capital will get blocked under GST (due to

GST on import and stock transfers)

l 95% of the respondents feel that mechanism

to transfer credit from one state to another

should be inbuilt in GST

l 78% of the respondents feel that their busi-

ness will be impacted due to rise in tax rate on

services

l 66% of the respondents feel that cash refund

would be an adequate substitute for tax bene-

fits

l 40% of the respondents feel that IT/system

changes will be a big challenge (it may take 4

months to reconfigure IT systems.

12) Any thoughts on the treatment of petroleum prod-

ucts, tobacco products, and alcohol? If included, how

will the retail prices be impacted? Or will the larger

impact be felt on state revenue loss?

These products could be brought under the GST tax net,

with power given to states to charge additional excise

duties over and above the standard SGST.

Survey Indicators


Impact on sectors largely positive

G S T S E C T O R A L I M PA C T

Manufacturing sector

Imposition of GST will reduce the tax burden on

the manufacturer as taxes will be paid on value

addition for both goods and services. Elimina-

tion of multiple tax structure will reduce cost,

enhance margins, add to profitability, and make

manufacturers globally competitive. The resultant

tax rate is expected to decline to 14-16% under

GST vis-à-vis the current tax rate of 20%. At the

same time, shift from one tax regime to another is

generally fraught with several challenges in terms

of infrastructure, administrative capabilities, and

business impact.

Pharmaceutical sector

Indian pharma sector is fraught with multiple tax-

ation (customs duty, excise duty, CST/VAT, service

tax, entry tax, octroi, cess). GST will lower trans-

action and compliance cost for the industry. Tax

credit benefits will reduce the cost of the goods

— this will enable Indian pharma companies, to

become more competitive globally (pharmaceu-

ticals are one of the key contributors to Indian

exports). Relocation and reduction of warehouses

will reduce the cost for the company and simplify

inter-state transactions. Location-based incentives

(like tax holiday in Himachal Pradesh and Uttara-

khand) may continue in the form of reimbursement

to ensure continuity of GST at every stage.

Currently, drugs and medicines fall under the

4-5% excise duty category and this is expected to

continue at the same rate under GST, while APIs

are taxed at 8%. Companies are unable to set-off

taxes due to tax differential between the input

and finished goods. GST tax rate is expected to

be higher than current API tax rate (if aligned with

GST, consumers could be burdened), tax set-off

benefit across the supply chain will be a significant

benefit for the industry.


Automobile sector

GST benefit will come in the form of simplistic

tax structure and inter-state stock movement. For

the automobile industry, 80% of the stock is sold

outside the manufacturing state through distributors

and stock transfers. CST is charged on the goods

movement (which increases the price of the good)

and CST cannot be set-off against VAT. This will lead

to consolidation of OEM plants and warehouses.

Negative will be in the form of stock transfers com-

ing under GST (which is currently tax-free or taxed

minimally by some states), however companies will

be able to set it off against other tax liabilities. GST

rate of around 16-18% will be good for the sector as

the current tax rate is higher, especially for big cars.

Logistics sector

The introduction of GST will bring huge opportu-

nities for this sector. Manufacturers will relocate

warehouses based on economic efficiencies and will

not need to have state-wise warehouses to adhere

to each state’s tax code. Currently, a company builds

warehouses across states (25-40 small warehouses

depending on regions and scale of operations) in-

stead of 6-8 large warehouses to cover entire India.

With GST coming in, consolidation of warehouses

will take place and there will be a focus on good

quality technology to increase the efficiencies. This

function could be outsourced to logistic service

providers, as they are well placed and prepared to

manage the distribution and supply chain.

Housing and construction industry

The Kelkar committee has recommended inclusion

of housing and construction in GST, considering its

contribution to GDP. Bringing this sector brought

under GST (stamp duty will be subsumed with GST)

will bring in transparency in this largely unorganised

and uncontrolled sector. All the newly constructed

residential as well as commercial segments will fall

under GST. Experts believe that the overall impact of

this measure on property prices would be marginal.

Others believe that different land laws across states

(even if tax rates are streamlined after GST) will keep

the structure complicated. However, government

officials have said that the burden on tax payers will

go down by as much as 25-30% after the introduc-

tion of GST.

FMCG Sector

For FMCG goods, excise duty rate varies from 4%

to 10%, and VAT from 4% to 15%, depending on

the product. Tax incidence on Indian FMCG sector

is supposedly the highest in the world along with

the complex tax structure. Warehouses and depots

are based on tax benefit (like for most other sectors)

and distribution cost is at 2-7% of turnover. Con-

solidation of warehouses should positively impact

FMCG margins (experts say 4-5% impact). Currently,

Distribution cost/sales of FMCG

Stage of supply chain

Purchase value of Input

Value addition Value at next stage

Rate of GST GST on output Input Tax credit Net GST= GST on output - In-

put tax credit

Manufacturer 100 30 130 10% 13 10 13-10 = 3

Whole seller 130 20 150 10% 15 13 15-13 = 2

Retailer 150 10 160 10% 16 15 16-15 = 1

GST Tax Impact Matrix


A) Goods-Producer to Whole-Seller Under VAT (Rs.) Under GST (Rs.)

Cost of Production 100,000 100,000

Add: Producersmarginofprofit 20,000 20,000

Producers basic price 120,000 120,000

Add: CentralExciseduty@8% 8000 NIL

Add: ServiceTax@10%onTransportation&Jobworkpaid 4000 NIL (Included in GST)

Add: [email protected]% 16500 NIL

Add: CentralGST@12% NIL 14,400

Add: StateGST@8% NIL 9,600

Total Price 148,500 144,000

(B) Goods –Whole-Seller to Retailer Under VAT (Rs.) Under GST (Rs.)

Cost of goods to the Whole-seller 132,000 120,000

Add:Profitmargin@10% 13,200 12,000

Total 145,200 132,000

Add: [email protected]% 1,650 NIL

Add: Central GST @ 12% NIL 1,440

Add: StateGST@8% NIL 960

(C) Goods-Retailer to Final Consumer

Cost of goods to the Retailer 145,200 132,000

Add:Profitmargin@20% 29,040 26,400

Total 174,240 158,400

Add: [email protected]% 3,630 NIL

Add: Central GST @ 12% NIL 3,120

Add: StateGST@8% NIL 2,112

Total Price to the final Consumer 177,870 163,632

Tax component in price to Final Consumer 21,780 31,632

Final Price ex-taxes 156,090 132,000

GST vs. VAT - Impact on consumer

The table below show that although tax burden on the consumer rises, the basic cost of the product (goods and services) falls, leading to a gain of approximately 8% for consumer.

Consumer

GST will be levied at the point of manufacturing, sale, and

consumption of goods and services at the central and state

level. Taxes will be paid on value addition; thus, manufac-

turers will be able to set off the taxes paid on purchase of

goods and services against the taxes payable on supply of

goods and services. Technically, manufacturers will benefit

while the entire burden will fall on the end-consumer. How-

ever, it is believed that GST will not be an additional burden

packaged foods are taxed at 4-5% rate,

if brought under GST (as talks are ripe

that exemption and low tax commodity

list will be pruned under GST), consum-

er may be burdened while companies

will remain neutral due to tax set-off

benefit.

Small and medium enterprises

The Empowered Committee has rec-

ommended (and states have agreed)

a threshold limit of Rs 1mn as annual

turnover for goods and services, below

which GST will not be levied. The

threshold limit should be same across

all the sectors and union territories.

Current exemption under VAT stands

at Rs 0.5mn for most states; it is lower

for north-eastern and special-catego-

ry states. The threshold under Centre

GST for goods is recommended at Rs

15mn and a similarly higher threshold

is recommended for services. Higher

threshold limits under GST vs. VAT will

bode well for SMEs.

As per a NCAER study (it is India’s old-

est and largest independent, non-profit,

economic policy research institute), GST

reform would benefit the small-scale

and other manufacturing units in unreg-

istered sectors relatively more than the

corresponding registered sectors — it

will do so by making capital cheaper

than before because GST will provide

the benefits of full tax offsets. on the consumer. Manufacturers of goods and services will

be able to save by shifting to GST as they will pay taxes on

value addition vs. total value of purchase. This benefit is ex-

pected to be passed on to the consumer. Tax rate is expect-

ed to decline to 14-16% vs. the current tax rate of 20%. This

should result in a positive impact on consumption demand

and inflation. Depending on the rate agreed on CGST and

SGST, a one-time inflationary reaction is possible as and

when GST is implemented. After that, it should be neutral

for inflation. As per the 13th finance Commission, inflation

should fall if GST rate is implemented at 12%.


Positive for the economy and for employment; short-term negative for inflation

G S T M A C R O I M PA C T

It is widely believed that implementation of GST

will have considerable impact on various econom-

ic parameters, businesses, and consumers. It is

expected to boost corporate profitability, margins,

and exports and greater compliance and broader

tax base should contribute to added economic

growth (NCAER estimate is 1.0-1.7%). GST im-

plementation will link domestic taxation norms to

international standards.

Exports: As per the current norms, central indirect

taxes (excise + customs) can be set-off while state

taxes (like central sales tax, electricity duty, sales

tax on petroleum products, mandi tax, entry taxes,

octroi, and municipal taxes) are not available for

set-off – thus, manufacturer tend to lose as much.

Cumulative impact of such un-rebated taxes is

between 3-12% of the fob export (depending on

the product and its state of origin). Under GST,

most of state taxes (along with central taxes) will

be reimbursed to the manufacturer and service

provider. Under this regime, exports are expected

to become tax-free, thereby enhancing the com-

petitiveness of Indian exporters.

Imports: Currently, imported goods are charged

a customs duty (12%), landing charges (1% CIF),

CVD (0-12%), education cess (3%), and addition-

al CVD (4%). Under GST, all these duties will be

subsumed, and SGST and CGST will have to be

paid on imported goods and services. Tax benefit

will go to the state where goods are supplied/

consumed. Since input tax credit will be available

on the taxes paid, it will be revenue neutral for

importers.

Fiscal deficit: GST should have a positive impact

on fiscal deficit as the government has decided on

introducing a revenue-neutral tax. Reduction in tax

evasion will have a positive fiscal impact. Higher

GDP, boosted by GST implementation, should

also stimulate fiscal consolidation. Initially, budget

outgo from centre to state will increase in order to

duly compensate the states for revenue loss. Once

the compensation period ends, fiscal consolidation

can be substantial as the centre will not have to

share taxes with states, which is the norm currently

(28% of the gross tax revenue). Revenue neutral

rate recommended for states is 6%; however, it is

being advised that states’ GST should be kept at

7% to ensure revenue gains.

Inflation: It is widely accepted and believed by

manufacturers and service providers that the entire

burden of GST will be passed on to the consumer

(in the advent of higher GST rate than the current

norm) and businesses will enjoy higher margins.

Thus, in a scenario of higher GST, inflation can inch

higher. However, with the passage of time, busi-

nesses may decide to pass on some of the benefit

to end-consumer. Competitive forces should also

help in correcting prices.

The current service tax rate is at 12%. If GST is

introduced around the current level, inflationary

impact will be nil — if it is higher, it will burden

the consumer. Another aspect is that service tax

coverage will be extended to all services (except

a negative list) – this will impact consumers. On

goods, total tax (central excise duty and State

VAT) comes out to be 25.5% currently. With the

introduction of GST, this should decline substan-

tially, thus bringing substantial benefits to consum-

ers. The overall inflationary impact of GST will be

based on the rate.


GDP gain 1-1.7% every year

Real Returns

Land 0.4-0.8%

Wage 0.7-1.3%

Capital 0.4-0.7%

Revenue Neutral GST rate 6.2-9.4%

Manufacturing

Output to rise Textiles, readymade garments, minerals other than coal, petroleum, gas, iron-ore, organic heavy chemicals, industrial machinery for food and textiles, beverages, and miscellane-ous manufacturing.

Output to decline Natural gas, crude petroleum, iron ore, coal tar products, and non-ferrous metal indus-tries.

Exports gain 3.2-6.3%

Exports to rise Textiles and readymade garments, beverages, industrial machinery for food and textiles, transport equipment other than railway equipment, electrical and electronic machinery, and chemical products.

Moderate gainers Agricultural machinery, metal products, and railway transport equipment

Exports to fall Agricultural sector, iron and steel, wood and wood products except furniture, and cement

Imports gain 2.4-4.7%

Imports to rise Leatherandleatherproducts,furnitureandfixtures,agriculturalsectors,coalandlignite,agricultural machinery, industrial machinery, other machinery, iron and steel, railway transport equipment, printing and publishing, and tobacco products

Moderate gainers Metal products, non-ferrous metals, and transport equipment other than railways

Imports to decline Textiles and readymade garments, minerals other than coal, crude petroleum, gas and iron ore, and beverages.

Inflation

Agricultureinflationtorise 0.6-1.2%

Manufacturinginflationtodecline 1.2-2.5%

NCAER Study

Empirical evidence of GST impact on inflation

and GDP in other countries is mixed. Studies

have shown that inflation inched higher after the

introduction of GST in Australia, Canada, and New

Zealand. However, GST or higher inflation did

not result in a wage-price spiral. In Canada, CPI

increased by 1.5% and GDP dropped by 1.2%.

Higher inflationary pressures resulted in higher

interest rates, thus creating an additional impact

on GDP. These countries have continued to bring

in changes to their initial GST structure, based on

economic response and impact. Other research

work has shown that adverse impact on macro

data was primarily due to lack of complete GST

implementation. It should be applied to all the

goods and services across the board.


Well-established globally, a step forward to meet international standards

G L O B A L G S T S T R U C T U R E

About 150 countries have adopted a GST or national-level

value-added tax framework, with GST rates varying from

5% to 27%. Studies have shown that higher indirect taxes

and lower direct taxes have limited impact on economic

growth and promote businesses. In the wake of the financial

crisis, developed countries raised GST/VAT rates to propel

economic growth. Average VAT rate in European Union has

increased to 21.4% in 2014 compared to 19.4% in 2008.

New entrants to join GST: Bahamas and Malaysia are

likely to implement GST/VAT in 2015. China has successfully

implemented a VAT pilot that replaces its much narrower

‘business tax’. Other countries such as the Gulf Cooperation

Council states are actively considering introduction of VAT/

GST system.

Actual revenue falls short of planned: Global evidence

suggests (OECD, 2009) that GST revenue earned has mostly

fallen short by 40-50% vs. the revenue stream planned. How-

ever, it is unclear if the shortfall is due to tax exemption, tax

avoidance, or difficulty in tax collection. At the same time,

evidence is sufficient that efficient and effective design of

GST plays an important role in implementation and revenue

collection. For example, New Zealand uses a broad base

with few exemptions, which could explain the good VAT

revenue ratio. At the other end of the scale, Mexico employs

zero or reduced rates on a wide range of supplies.

Legislative changes continue: EY carried out a global

survey (Nov 13) on frequency of VAT/GST changes, cover-

ing 96 countries. It showed that in more than 50% of the

participating countries, the primary indirect tax legislation

changes at least once a year, and in more than 20 countries,

major changes take place more frequently than once a year.

The reasons for continuous legislative changes are — to add

efficiency to tax structure, to address fraud, technological

upgradation, and due to the influence of multi-territory indi-

rect tax systems. Legislative changes add to the problem of

understanding the change and implementing the change for

the businesses.

Study by OECD

VAT has been adopted in more than 150 countries across

the world due to factors like globalisation, systemic neutral-

ity of tax towards international trade, and its efficiency in

raising revenues. It accounts for one-fifth of the tax revenue

of the OECD nations. VAT systems are largely made on the

same core VAT principles. However, variation is seen across

countries in the way it is implemented – wide range of rate,

exemptions, and special arrangements that are designed for

non-tax policy objectives.

VAT rates: Global VAT rates remained stable between 1996

and 2008. However, they have risen since then in order to

ensure fiscal consolidation. At the same time, tax rates on

essentials – medical, hospital care, food, and water supplies -

have been reduced.

Standard rates of VAT


Exemptions: Although exemptions are a departure from the

basic rule of VAT, all OECD countries (except New Zealand

and Turkey), exempt socially-oriented sectors like health,

education, and charities. In addition, most countries also

use exemptions for practical reasons (financial and insur-

ance services due to the difficulty of assessing tax base) and

for historical reasons (postal services, letting of immovable

property, supply of land and buildings). Exemptions result in

movement away from neutrality and may result in a cascad-

ing effect, which will depend on the stage of supply chain

at which exemption is allowed; just prior to final sale will not

result in cascading impact and the consequence will be only

loss of revenue from the last stage of value addition. Exemp-

tion of financial services creates huge distortion with respect

to both consumer and business decisions.

Thresholds: There is no consensus on thresholds across

OECD countries. The main reason for excluding small busi-

nesses is the disproportionate cost involved versus revenues

generated in tax administration. Similarly, VAT compliance

cost for small businesses is disproportionate.

Restrictions on right to deduct VAT: According to VAT prin-

ciples, right to deduct input taxes should be limited to the

extent that those inputs are used for the taxable purposes

of businesses. The right of deduction is legitimately denied

where inputs are used to make onward transactions that fall

outside the scope of the tax such as tax exemptions. This

is also the case for input tax relating to purchases that are

not wholly used for furtherance of taxable business activity,

for example, when they are used for the private needs of

the business owner or its employees. Most OECD countries

have legislation in place that provides for blocking input tax

deduction on a number of goods and services because of

their nature rather than because of their use by business-

es, generally with a view to ensure (input) taxation of their

deemed final consumption (e.g., restaurant meals, reception

costs, hotel accommodation, use of cars by the employees of

businesses, etc.)

Measuring performance – VAT revenue ratio (VRR): VAT

revenue ratio is defined as actual tax collected vs. the reve-

nue that would theoretically be raised if VAT was applied at

the standard rate to all final consumption. The ideal rate for

revenue ratio is 1. Low VRR indicates a reduction in tax base

due to a large number of exemptions or reduced rates or a

failure to collect all due taxes. New Zealand and Luxembourg

have a VRR of 0.98 and 0.93, respectively. Most countries

Category-wise tax revenue as a % of total tax (%)

EU VAT / GST rates (%)

VAT as a % of EU GDP and Tax revenue (%)


(26 of 33) have a VRR below 0.65 and about half (14 of 33)

have a ratio below 0.50 with an OECD average of 0.55. This

suggests that about one half of potential VAT revenue is not

collected. Weak VRR suggests that most OECD countries

apply VAT only on a narrow tax base giving a wide range of

exemptions. It also reflects the lower rates that exist in most

member countries.

VAT and GST system in federal countries with dual rate

structure: GST system is appropriate in countries where

centre and state enjoys tax authority as it prevents cascading

effect between overlapping taxes and states’ tax competi-

tion. In this section, we have looked at countries like Canada

and Brazil which also work under dual GST structure.

Canada’s experience has shown that it is possible to suc-

cessfully implement dual GST in a federal state. In Canada,

both federal and provincial governments have the power to

levy consumption and sales taxes. New harmonised sales

tax includes federal GST and provincial sales tax and applies

normally to the same base. HST is normally levied at 13% and

includes a 5% federal tax.

Brazil on the other hand reflects the ‘not one size fits all’

approach. Brazil follows a tax model where tax powers

are shared at various levels of government with no federal

harmonisation of the tax base as this would grant too much

control to the federal government. Union, states, and federal

districts have the power to legislate on tax, but the scope of

the power varies.

Conclusion

GST should be implemented as soon as possible, even with

exemptions in the beginning. With time, changes can be

brought in the GST structure. GST is going to be a significant

indirect tax reform for India, benefiting companies and the

government immensely. Companies will benefit from tax sim-

plification and elimination of cascading effect for goods and

services. Both central and state governments will benefit from

revenue increment due to wider base, minimum leakage, and

higher compliance. GST aims at taxing consumption — there-

fore, the consumer may be burdened initially. However, com-

petitive forces should eventually bring price stability. Compa-

nies will not be impacted if GST tax rate is set on the higher

side due to credit benefit facility under GST at every stage.

Consumer demand may suffer in case of higher tax rate.

At the current juncture, the basic GST framework exists with

limited information on specific details for the industry. At the

VAT Revenue Ratio

time of implementation, sufficient time should be provided

to the industry to upgrade their systems. Government should

provide a simple IT platform that small businessmen can

understand, for them to comply with GST easily.

Global experience shows that more exemptions defeat the

advantages of GST and result in a cascading effect and lower

tax revenue. Exemptions should be limited to necessary com-

modities and services. In India, petroleum and alcohol are

being contemplated for exclusion. This will certainly have an

adverse impact for companies and central government. GST

introduction is keenly awaited by ALL!


Atanu Bagchi, CFO CanFin Homes Ltd

We met up with Mr. Atanu Bagchi, Chief Financial Officer of Canfin Homes in May 2014 to understand the turnaround in Canfin Homes and the business strategies of its management. Mr. Bagchi has vast experience in mortgage business and in its 20years association with Canfin Homes; he was posted in various branches across India. Supe-rior product offering; prudent lending practices and efficient customer service has provided the thrust to the business momentum of Canfin Homes. Excerpts of our interaction with Mr. Bagchi

Gaining Momentum

BY MANISH AGARWALLA

Canfin Homes was incorporated way back in

1987, even before LIC HF came into existence;

still Canfin Homes’ asset size is just 6% of LIC

HF’s asset size. Why?

The low growth was due to a couple of reasons

— Canfin Homes has always been conservative

in its approach in terms of new business. That

has in a way restricted our disbursement growth.

Management is deputed from Canara bank and

until current management; the tenor of previous

management was shorter and Canfin Homes did

not spread its wings in terms of reach. With the

change in industry dynamics — from a seller’s

market to buyer’s market — Canfin took time to

change its approach towards sourcing business.

What has changed now, because in last 2 years,

the disbursement growth has been very ag-

gressive and asset size has increased at a CAGR

of 47%? Is the momentum likely to continue?

The focus and direction of the current manage-

ment has played a pivotal role in the transfor-

mation. Canfin has also added branches — from

52 in FY12 to 83 in FY14. It also started new

delivery channels such as appointing direct selling

agents to push sales. We have also implemented

a core-banking solution for faster, efficient, and

real-time transmission of MIS.

Our workforce has increased from 252 in FY12

to 367 in FY14. With the addition of branches,

delivery channel, and new workforce, today our

turnaround time for individual mortgage loans has

come down to 7-10 days compared to a month for

comparative public sector banks. New product of-

ferings, added distribution network, and improved

efficiency will continue to provide the momentum

to the business.

What are the products Canfin Homes offers

today? What is the customer profile and where

are you dominant (geographically)?

We offer an entire suite of mortgage products


starting from plain-vanilla loans for home purchase

home construction loans, loans for home exten-

sion/repairs/ renovation/up gradation to Loan

against property. We give non-home loan prod-

ucts such as builder’s loans, loans on commercial

property, loans on rent receivable, personal loans

(top-up loans) etc. Home-loan portfolio constitutes

92% of our loan book while non-home loan is the

balance. Average loan ticket size is Rs 1.6mn and

88% of the housing loan portfolio is towards sala-

ried class. Southern region comprises 73% of our

loan book size.

What is the loan processing structure? How do

you ensure that asset quality is maintained?

The process of loan approvals in the company is

fairly decentralized with power to sanction the

loans delegated at various levels in the manage-

ment hierarchy. The power to sanction loans is well

defined in the credit policy for various designa-

tions and for various products. Approval of pro-

posals, which fall beyond certain limits (those that

need the attention and decision making at higher

levels) are referred to and sanctioned by a higher

authority or management committee / the board

of directors.

Given the business size, the Canfin Homes does

not work on vertical platform. The sanctions at

branches are done once the applicant fulfils all

criteria mentioned in our predetermined credit

policy. Any deviation has to be vetted by higher

authorities at the head office. All the loan servicing

can be tracked on a real-time basis. Auto alerts are

sent to concerned branches and the head office

for overdue loans. Follow-up process is initiated till

the accounts are normalized.

What are the yields and spreads in the overall

portfolio (home and non-home)? How is the

loan mix likely to behave?

The overall yield and spread is 11.3% and 1.7%

respectively. Within this, the yield and spread in

home loan portfolio stands at 10.95% and 1.35%

respectively and in case of non-home loan portfo-

lio, the same stands at 14% and 4.4% respectively.

Focus continues to remain on individual home

loans and a balance will be maintained between

home and non-home so as to maintain a decent

spread and return ratio.

What is the funding mix and how is the mix

expected to move going forward?

Our major source of funding comes from bank

loans (52%); refinance from NHB (41%); depos-

its from public (3%); and debentures (4%). Bank

loans are availed at a base rate ranging from

10.0-10.25%; average cost of refinance from NHB

works out to be 9.6% and debentures are at 9.6%.

The proportion of NCDs is expected to increase

further.

The asset quality has been remarkable till date

— is the GNPA and NNPA levels sustainable?

The GNPA stands at 0.2% against the industry

average of 0.7% and NNPA stands at 0%. The low

level of GNPA is on account of Canfin Homes’ pru-

dent loan-appraisal policies and timely follow-up

at the beginning of overdue period. The decline in

percent terms is due to higher loan book growth

in previous few years, even in absolute terms

the GNPA declined from Rs157mn in FY13 to

Rs121mn in FY14 due to constant effort of recov-

ery through Sarfaesi act, personal persuasion and

OTS. Sustainability of such low level is practically

difficult. However the endeavor would be to main-

tain GNPA & NNPA much below industry level.


Indian Economy – Trend Indicators

Monthly Economic Indicators

Quarterly Economic Indicators

Growth Rates (%) Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

IIP -1.8 2.6 0.4 2.7 -1.2 -1.3 0.1 1.1 -1.8 -0.5 3.4 5.0 3.4 1.9

PMI 50.3 50.1 48.5 49.6 49.6 51.3 50.7 51.4 52.5 51.3 51.3 51.4 51.5 52.2

Core sector 1.2 5.3 3.7 8.0 -0.6 1.7 2.1 1.6 4.5 2.5 4.2 2.3 7.3 2.7

WPI 5.2 5.9 7.0 7.0 7.2 7.5 6.4 5.1 5.0 6.0 5.5 6.2 5.4 5.2

CPI 9.9 9.6 9.5 9.8 10.2 11.2 9.9 8.8 8.0 8.3 8.6 8.3 7.5 8.0

Money Supply 12.8 12.5 12.2 12.5 13.0 14.5 14.9 14.5 14.5 13.5 13.9 13.2 12.2 12.7

Deposit 13.8 13.5 13.1 14.1 14.4 16.1 15.8 15.7 15.9 14.6 15.1 13.8 12.2 12.7

Credit 13.7 14.9 17.1 17.8 16.6 15.5 14.5 14.7 14.4 14.3 14.1 12.8 13.1 13.1

Exports -3.6 11.6 13.0 11.2 13.5 5.9 3.5 3.8 -3.7 -3.2 5.3 12.4 10.2 7.3

Imports -2.4 -5.6 -0.7 -18.1 -14.5 -16.4 -15.2 -18.1 -17.1 -2.1 -15.0 -11.4 8.3 4.3

Tradedeficit(USD Bn) -11.3 -12.5 -10.9 -6.8 -10.6 -9.2 -10.1 -9.9 -8.1 -10.5 -10.1 -11.2 -11.8 -12.2

Net FDI (USD Bn) 1.8 1.7 1.7 3.3 1.8 2.4 1.9 0.4 -0.1 2.1 2.0 4.8 2.4 -

FII (USD Bn) -8.7 -4.7 -2.0 0.2 -0.4 0.0 2.9 2.6 1.5 5.4 -0.1 7.7 4.8 -

ECB (USD Bn) 2.0 3.7 2.3 3.3 1.9 2.2 4.6 1.8 4.3 3.6 3.2 1.5 1.9 -

NRI Deposits (USD Bn) 2.6 1.3 1.1 5.9 4.5 14.6 2.0 0.7 0.7 2.5 1.4 1.1 0.0 -

Dollar-Rupee 58.4 60.6 63.0 63.8 61.6 62.6 61.9 62.1 62.2 61.0 60.4 59.3 60.2 60.1

FOREX Reserves (USD Bn) 284.6 280.2 275.5 276.3 283.0 291.3 295.7 292.2 294.4 303.7 309.9 312.4 315.8 320.6

Balance of Payment (USD Bn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15Exports 75.0 72.6 74.2 84.8 73.9 81.2 79.8 83.7 81.7Imports 118.9 120.4 132.6 130.4 124.4 114.5 112.9 114.3 116.4Tradedeficit (43.8) (47.8) (58.4) (45.6) (50.5) (33.3) (33.2) (30.7) (34.6)Net Invisibles 26.8 26.7 26.6 27.5 28.7 28.1 29.1 29.3 26.8CAD (17.1) (21.1) (31.8) (18.2) (21.8) (5.2) (4.1) (1.3) (7.9)CAD (% of GDP) 4.0 5.1 6.5 3.5 4.9 1.2 0.8 0.3 1.7Capital Account 16.5 20.7 31.5 20.5 20.6 (4.8) 23.8 9.2 19.8BoP 0.5 (0.2) 0.8 2.7 (0.3) (10.4) 19.1 7.1 11.2

GDP and its Components (YoY, %) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15Agriculture & allied activities 1.8 1.8 0.8 1.6 4.0 5.0 3.7 6.3 3.8 Industry (0.6) 0.1 2.0 2.0 (0.9) 1.8 (0.9) (0.5) 4.0 Mining & Quarrying (1.1) (0.1) (2.0) (4.8) (3.9) - (1.2) (0.4) 2.1 Manufacturing (1.1) (0.0) 2.5 3.0 (1.2) 1.3 (1.5) (1.4) 3.5 Electricity, Gas & Water Supply 4.2 1.3 2.6 0.9 3.8 7.8 5.0 7.2 10.2 Services 6.7 6.5 6.1 5.8 6.5 6.1 6.4 5.8 6.6 Construction 2.8 (1.9) 1.0 2.4 1.1 4.4 0.6 0.7 4.8 Trade, Hotel, Transport and Communications 4.0 5.6 5.9 4.8 1.6 3.6 2.9 3.9 2.8 Finance, Insurance, Real Estate & Business Services 11.7 10.6 10.2 11.2 12.9 12.1 14.1 12.4 10.4 Community, Social & Personal Services 7.6 7.4 4.0 2.8 10.6 3.6 5.7 3.3 9.1 GDP at FC 4.5 4.6 4.4 4.4 4.7 5.2 4.6 4.6 5.7


Annual Economic Indicators and Forecasts Indicators Units FY6 FY7 FY8 FY9 FY10 FY11 FY12 FY13 FY14E FY15E

Real GDP growth % 9.5 9.6 9.3 6.7 8.6 8.9 6.7 4.5 4.7 5.7

Agriculture % 5.1 4.2 5.8 0.1 0.8 8.6 5 1.4 4.7 1.5

Industry % 8.5 12.9 9.2 4.1 10.2 8.3 6.7 0.9 (0.1) 4.2

Services % 11.1 10.1 10.3 9.4 10 9.2 7.1 6.2 6.0 6.9

Real GDP Rs Bn 32,531 35,644 38,966 41,587 45,161 49,185 52,475 54,821 57,418 60,691

Real GDP US$ Bn 733 787 967 908 953 1,079 1,096 1,008 950 1,012

Nominal GDP Rs Bn 36,925 42,937 49,864 56,301 64,778 77,841 90,097 101,133 113,551 127,643

Nominal GDP US$ Bn 832 948 1,237 1,229 1,367 1,707 1,881 1,859 1,878 2,127

Population Mn 1,106 1,122 1,138 1,154 1,170 1,186 1,202 1,219 1,236 1,254

Per Capita Income US$ 753 845 1,087 1,065 1,168 1,439 1,565 1,525 1,519 1,697

WPI (Average) % 4.5 6.6 4.7 8.1 3.8 9.6 8.7 7.4 6.0 5-5.5

CPI (Average) % 4.2 6.8 6.4 9 12.4 10.4 8.3 10.2 9.5 7.5-8

Money Supply % 15.5 20 22.1 20.5 19.2 16.2 15.8 13.6 13.5 14.0

CRR % 5 6 7.5 5 5.75 6 4.75 4.0 4.0 4.0

Repo rate % 6.5 7.5 7.75 5 5 6.75 8.5 7.5 8.0 8.0

Reverse repo rate % 5.5 6 6 3.5 3.5 5.75 7.5 6.5 7.0 7.0

Bank Deposit growth % 24 23.8 22.4 19.9 17.2 15.9 13.5 14.4 14.6 15.0

Bank Credit growth % 37 28.1 22.3 17.5 16.9 21.5 17.0 15.0 14.3 16.0

CentreFiscalDeficit Rs Bn 1,464 1,426 1,437 3,370 4,140 3,736 5,160 5,209 5,245 5,312

CentreFiscalDeficit % of GDP 4 3.3 2.9 6 6.4 4.8 5.7 5.2 4.6 4.1

Gross Central Govt Borrowings Rs Bn 1,310 1,460 1,681 2,730 4,510 4,370 5,098 5,580 5,639 5,970

Net Central Govt Borrowings Rs Bn 954 1,104 1,318 2,336 3,984 3,254 4,362 4,674 4,689 4,573

StateFiscalDeficit % of GDP 2.4 1.8 1.5 2.4 2.9 2.1 2.3 2.2 2.5 2.5

ConsolidtedFiscalDeficit % of GDP 6.4 5.1 4.4 8.4 9.3 6.9 8.1 7.4 7.1 6.6

Exports US$ Bn 105.2 128.9 166.2 189.0 182.4 251.1 309.8 306.6 318.6 328.2

YoY Growth % 23.4 22.6 28.9 13.7 -3.5 37.6 23.4 -1.0 3.9 3.0

Imports US$ Bn 157.1 190.7 257.6 308.5 300.6 381.1 499.5 502.2 466.2 500.2

YoY Growth % 32.1 21.4 35.1 19.7 -2.5 26.7 31.1 0.5 -7.2 7.3

Trade Balance US$ Bn -51.9 -61.8 -91.5 -119.5 -118.2 -129.9 -189.8 -195.6 -147.6 -172.0

Net Invisibles US$ Bn 42.0 52.2 75.7 91.6 80.0 84.6 111.6 107.5 115.2 118.1

CurrentAccountDeficit US$ Bn -9.9 -9.6 -15.7 -27.9 -38.2 -45.3 -78.2 -88.2 -32.4 -54.0

CAD (% of GDP) % -1.2 -1.0 -1.3 -2.3 -2.8 -2.6 -4.2 -4.7 -1.7 -2.5

Capital Account Balance US$ Bn 25.5 45.2 106.6 7.8 51.6 62.0 67.8 89.3 48.8 63.5

Dollar-Rupee (Average) 44.4 45.3 40.3 45.8 47.4 45.6 47.9 54.4 60.5 60.0

Source: RBI, CSO, CGA, Ministry of Agriculture, Ministry of commerce, Bloomberg, PhillipCapital India Research


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