One Nation One Tax – GST Decoded

– By Varun Krishna Gupta and Chandra Sekhar Routray

At the midnight-joint session of Indian parliament when the gong sounded, the iconic goods and services tax was rolled out. This was only the fourth such occasion in the history when such a session was conducted. GST replaced 17 state and federal levies on everything. Earlier sellers went through a nightmare of central and state sales tax, entry tax, turnover tax, service tax, excise, and octroi. This cascading effect of taxes made India one of the highest indirectly taxed nations in the world. GST effectively terminates this cascading effect and embodies the essence of “One Nation, One Tax”.

GST Models across the Globe

France, became the first nation, to implement GST in order to curb tax- evasion. Since then, more than 140 countries have implemented GST.  Some countries like Brazil and Canada have implemented a dual model of GST. India has also implemented the dual model of GST. According to a report from Nomura Holdings Inc. GST rollout fueled inflation in countries like Australia, Japan, Malaysia, and Singapore. The reason being the tax rate was lower than pre-existing rates. U.S.A does not have GST, as it ensures high autonomy for the states.

Indian version of GST

India customized the dual GST model to synchronize with the needs of its economic transaction.

Particulars

India (Proposed) Canada UK
Standard Rate 0% (for food staples), 5%, 12%, 18% and 28% (+ Cess for luxury items) GST 5% and HST varies from 0% to 15% 20% Reduced rates- 5 %, exempt, zero rated
Threshold Exemption Limit 20 lakhs (10 lakhs for NE states) Canadian $ 30,000 (Appx ₹15.6 lakhs) £ 73,000 (Appx ₹61.32 lakhs)
Returns and Payments Monthly and one annual return Monthly, quarterly or annually based on turnover Usually quarterly. Small business option- annual
Reverse Charge
Mechanism
Applicable on goods (new) as well as services (currently under Service tax) Reverse charge applies to importation of services and intangible properties. Applicable
Exempt Services A number of food items have been exempted from any of the tax slabs.
Fresh meat, fish, chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, all kinds of salt, jaggery and hulled cereal grains have been kept out.
Real estate, Financial Services, Rent (Residence), Charities, Health, Education Medical, Education, Finance, Insurance, Postal services

Chinks in the GST Bill Armor

Different Tax Slabs – AC and non-AC, outdoor and indoor will be having different tax rates. So, a restaurant having both has to make different arrangements.

Anti-Profiteering Rule – The law doesn’t clarify how the costs incurred on account of the transition from GST to non-GST era are to be factored in. It also doesn’t specify how loss-making units pass on the benefits. Many companies are producing two sets of price tags for the same product to avoid confusion. But a comparison of profit or loss for pre- and the post-GST period would be difficult for companies.

Unorganized Sector– India being mostly an unorganized economy with smaller companies comprising nearly 45 percent of manufacturing, an establishment of this supply chain is difficult.

Tax Credit – There is little clarity on input tax credit on the old goods produced before July 1. GST isn’t a retrospective tax and since traders have already paid taxes for the existing stock, there are concerns about their old stocks.

GST Return Forms – According to GST rules, businesses will have to file 37 forms in a year—three each month for CGST, IGST and SGST, and one at the year’s end. For a company with operations in 20 states, it means 740 annual returns.

Conclusion

GST aims to create a uniform tax structure pan-India, removing several layers of taxation. As the time progresses, clarity will follow on many fronts. According to analysts, GST can increase India’s GDP by 2%, by transforming India into a common market larger than Europe, the US, Brazil, Mexico, and Japan combined.

Budget Impact Analysis – Auto Sector

By Dhanyakumar M H

Expectations from Industry:

  • Cut in corporate tax from 30 to 25%
  • Implementation of the vehicle scrappage scheme
  • Incentives for hybrid and electric car production to be extended
  • Removal of connection between size of car and tax
  • Push for infrastructure to offer a quality road in the long run

What Budget has to offer?

  • Personal Income tax:
    • Increase in zero income tax slab from 2.5 lakh to 3 lakh
    • Reduction in income tax from 10% to 5% for income between 2.5 to 5 lakh

Increases in household disposable income. Provides a boost to first-time auto buyer preferably two-wheeler or entry level car.

  • Infrastructure development:
    • Better the infrastructure in the country, is an incentive and encouragement for Auto Industry
    • Budget is seen as a pro-development and this would boost the sales of MHCV, HDCV and heavy equipment
  • Goods and Service Tax:
    • Implementation of GST is confirmed, but there was no message to Auto industry regarding the removal of the link between size and taxation.
  • Rural Income and Agriculture:
    • Mission of doubling farmer income would help increase the disposable income
    • Interest waiver for 60 days due to the impact of demonetization is a welcome move
    • Expected to see a 4.1% increase in Agri output

Increase in rural income would help two wheelers, tractor and entry level car manufactures. It may also help an LCV segment of commercial vehicles.

  • Market Reaction: Advance in stocks
    • Bajaj Auto, Hero Motocorp and TVS Motor
    • M&M, Maruti Suzuki, Eicher Motors, Tata Motors and Ashok Leyland
    • Escorts and VST Tillers
    • Auto Ancillaries are also shown an advancement in stock prices

Conclusion:

Overall the budget has not met the expectation of the auto industry and there was no surprise as well. But the move towards reducing personal income tax and push for rural India is welcomed. As this would increase the disposable income, industry expects an increase in sales of two wheelers, tractors, entry level cars and finally MHCV & HDCV because of push to infrastructure development. Industry is hoping to see more revival post GST implementation as there will be zig-zag in tax structure.

Budget Impact Analysis – FMCG and Consumer Durables Industry

By Nishant D’Souza

Year on year FMCG companies has posted robust results in their 3rd quarter reason being many major festivals happen during this period. However, the same was not emulated this year, companies posted flat or below par results as demonetization sent the FMCG sector into paralysis and the only budget could be the probable savior.

Measures and their impact:

  • Income tax has been lowered from 10% to 5% for individuals in tax slab 2.5 lakh- 5 lakh – This will greatly benefit the youth considering the fact that many falls in this tax bracket. Even individuals earning up to 8 lakhs will surely make an effort to bring their taxable income within the 5 lakhs tax slab. We shall see a launch of many entry-level products in the white goods sector.
  • Increase in MNREGA allocation from 38,500 crores to 48,000 crores year on year – MNREGA scheme provides a minimum of 100 days of guaranteed wage payment to every individual who has opted to do unskilled manual labor. MNREGA has already been a success in providing employment for rural folks during off-season farming. Considering the fact we had good monsoon in most parts of the country and with this increase in MNREGA allocation FMCG companies having exposure in rural areas will greatly benefit. FMCG companies will amend their existing products into smaller packs to attract rural attention.
  • Reduction in presumptive tax from 8% to 6% under section 44AD for gross payments received through electronic mode – This will benefit professionals and we can expect a rise in white goods sales with summer soon approaching. I don’t see mom and pop stores declaring taxable income even after this tax discount.
  • Reduction in corporate tax from 30% to 25% for companies with an annual turnover below 50 crores – Many raw material supplying companies fall within this tax bracket, we can expect a reduction in the cost of raw materials.

A lot of initiatives have been undertaken to revive agricultural growth and increase the focus of investments in rural areas:

  1. A target of 10 lakh fixed per person as agricultural credit and overall target of 10 crores for the financial year 2017-2018.
  2. Extension of tenure of loans under Credit Linked Subsidy Scheme of the Pradhan Mantri Awas Yojana to 20 years.
  3. Allocation for agriculture sector has increased by 24% to Rs 1,87,223 crores.
  4. 8,000 crores set aside for dairy processing infrastructure fund.

Additional surcharge of 10% on annual income over 50 lakhs will surely come as a dent on the revenues of the high-end service industry.

Apart from the change in excise duty on cigarettes no other change in service tax or excise duty was witnessed. Abolition of Foreign Investment Promotion Board should witness the much needed FDI in the consumer durable industry. Overall this budget has greatly helped in meeting the expectations of the corporates who have been vying for an increase in the personal disposable income.

 

Budget Impact Analysis – Banking & Financial Sector

By Payal Sachdeva and Tuhina Kumar

Expectations

  1. Increase in tax concessions on bad loan provisioning as the Asset Quality Review by RBI has led to a steep increase in provisioning.
  1. The total requirement of capital infusion by banks till march 2019, as gauged in 2015, is 1,80,000 crores out of which the government has committed to allocate only 70,000 crores under the Indradhanush plan. The rest is expected to be raised by the banks from the markets. This may be difficult due to low valuation of the banks.
  1. Disinvestment in PSU banks to below 51% to help raise capital.
  1. Higher allocation to infrastructure, housing and urban development as a boost in the commodity sector would improve the banks’ asset quality.
  1. Provide a roadmap of incentives for a digital push.
  1. Enhance capital expenditure for credit demand revival.

Announcements made in the Budget

  • Abolishment of FIPB: The Foreign Investment Promotion Board (FIPB) will be abolished in 2017-2018. FIPB is the body responsible for approving FDI proposals which are not cleared through the automatic route. Since 90% of the FDI inflows are through automatic route, the government has taken up this measure. Also, it focusses on ease of doing business.
  • Housing Finance:  Under the government’s aim to provide housing for all by 2020, the government proposed various measures. National Housing Bank (NHB) will refinance loans worth 20k crore in 2017-2018. This move saw a rise in stocks of HDFC (3.6%) and LIC Housing Finance (2.78%).
  • Tax relief on Masala Bonds: The government has announced that the rupee-dominated offshore bonds, called masala bonds will be subjected to a lower tax deducted at source (TDS) of 5%. This would be applicable retrospectively from 1st April 2016. This has been done to provide relief arising due to the appreciation of rupee against a foreign currency.
  • Law on Money Laundering: To curb money laundering by high net worth individuals via fake long-term capital gains, the government has tightened the screws on long-term capital gains. Only those equity investments are eligible for long-term capital gains where securities transaction tax (STT) has been paid.
  • Move to attract FPI: In order to attract funds from FPI, the finance minister made a proposal to exempt category I and category II FPIs from the provision of indirect tax transfer. Category I foreign portfolio investors include foreign central banks, sovereign wealth funds, and government agencies.
  • Recapitalization of banks: The government is going to infuse 10,000 crores out of the 70,000 crores committed under the Indradhanush plan for recapitalization of banks.
  • Set up PARA: An idea to set up a centralized Public Sector Asset Rehabilitation Agency (PARA) that will take over banks’ largest and the most challenging bad loans. PARA will help reduce NPAs and restructured loans.
  • Amendment in SARFAESI Act: The amendment in the SARFAESI act will allow listing and trading of security receipts issued by securitization company or a reconstruction company on SEBI-registered stock exchanges. This will boost capital flows in the securitization industry and aid in dealing with NPAs.
  • Mudra Yojana: The Pradhan Mantri Mudra Yojana has been allocated 2.44 lakh this fiscal as it exceeded the target of 1.22 lakh crore allocated in the year 2015-16.
  • Attempt to push Digital Economy: In an attempt to promote digital transactions in the Indian economy, the allocation to BharatNet Project has been increased by Rs 10,000 crore in 2017-18 which will connect 150,000-gram panchayats with high-speed broadband. Also, BHIM, an Aadhaar-based mobile wallet, would be promoted under two schemes, a referral bonus scheme for individuals and a cashback scheme for merchants.
  • The Role of SIDBI: Moreover, the government wants to ease loan disbursement, where the Small Industries Development Bank of India (SIDBI) would refinance credit institutions for extending unsecured loans to borrowers at reasonable interest rates based on their digital transaction history.

Conclusion

The government has met most of the expectations except for more capital infusion in the banks.  Thus, markets reacted positively to the budget and financial stocks shot up. Both Nifty and Sensex closed at a 3-month high of 28000 and 8700 respectively.

Stock Recommendation

The government’s move towards affordable housing is likely to push CanFin Homes as its loan portfolio is skewed towards the same.

 

Budget Series 2017-18 #5 Tax Implications

By Nimisha Khattar & Tushar Abhyankar

Before the budget was due, speculations were rife that the Union Budget of 2017 will bring relief to the taxpayers especially individuals. The move was correctly guessed so, as this budget brought a reduction in taxes. Following are some of the important tax amendments in this Budget –

Individual Tax Rates

The Finance Minister announced a cut in tax rate from 10% to 5% in the individual tax slab of Rs.2.5 lakh to Rs.5 lakhs. But the rebate under section 87A was reduced from Rs. 5,000 to Rs. 2,500 for the above income group. In spite of this, the individual who has a taxable income of up to Rs.3 lakhs does not have to pay any tax. The total tax savings for individuals between income Rs.3 lakhs to Rs.5 lakhs and between Rs.5 lakhs to Rs.50 lakhs is Rs. 7,700 and Rs. 12,900 respectively.

However, the large taxpayers have come under the ambit of bigger tax bracket owing to a surcharge of 10% to be levied if income if between Rs.50 to Rs.1 crore.

The other tax rates and surcharges, and 80C limit of Rs.1.5 lakhs will remain the same.

Lower Capital Gains Tax

The holding period for land, in order to be qualified as a long-term asset, has now reduced to 2 years from the earlier period of 3 years. This means that if the land is sold after two years, then it will be subjected to Long Term Capital Gains tax at the rate of 20%, instead of being taxed as short-term capital gains with a tax rate 30%

Also, the base year for calculating the indexed cost has changed from 1981 to 2001.

Simpler Tax Form

A simple one-page form will be introduced for the individuals whose taxable income excluding business income is less than Rs.5 lakhs.

Also, the individuals who are filing their tax returns for the first time will not be subjected to scrutiny unless it’s reasonably doubtful.

Corporate Taxes Slashed

The tax rate for MSME companies with income less than Rs.50 lakhs has been reduced from 30% to 25%.

House Property

The unlimited interest deduction under house property, given on rent has been limited to Rs.2 lakhs. This will reduce the demand for buying the second property.

Other Amendments: –

Penalty up to Rs. 20,000 will be imposed on the taxpayers who do not file their returns on time. The penalty shall not exceed Rs. 1,000 in case total income is less than Rs.5 lakhs

Reopening of tax cases up to 10 years if search operations reveal undisclosed income, over and above Rs.50 lakhs.

TDS of 5% to be deducted on rental payments above Rs. 50,000 per month, in order to bring higher rental income individuals under the tax bracket.

Emergency withdrawal up to 25% from National Pension Scheme (NPS) will not attract any tax.

Budget Series 2017-18-#2 Impact on Auto Sector

Roshan Raghuram & Jananee R Chandran

A look at the Union budget

Transform, Energise and Clean: the three-point agenda of the Union budget has very well reflected in its focus on job creation, rural spending, digitization, and GST. Some of the highlights are:

  • Total allocation to agriculture up by 24%, to double the farm income in five years
  • Infrastructure spending up by 11%, against the sluggish private sector investment
  • Housing for all by 2022-being the main job creator to help in demand revival
  • Disincentives on cash transactions to help in the retention of bank deposits, which will bring down market interest rates further
  • Widening of tax base and compliance, a significant medium-term positive to support quality spending

Auto sector: An introduction

Indian automobile sector is one of the largest and most dynamic in the world, resisting and growing positively through economic changes. India has emerged to be the 2nd largest two-wheeler maker, 6th largest car manufacturer and the 8th largest commercial vehicle manufacturer in the world. The 92 billion dollar industry contributes 7.1 % of the country’s GDP and is responsible for the employment of 19 million people in the country.

Recent news in the industry

  1. A shift in paradigm in the industry: IT and e-commerce industries have reshaped the way the industry operates.
  2. Fuel emission norms and safety norms: In the era of global standards, we see India getting in line with the Euro emission norms. This translates into shorter product life cycle for the vehicles and an increase in the frequency of new models. The compulsory air bags regulation coming in the year 2017 would increase the demand for the auto ancillaries in the country.
  3. The impact of GST: There are broadly two kinds of prices in front of a car buyer: showroom price and on-road price. Prior to GST, excise duty levied on showroom price was 20% and a sales tax of 12.5 % (average of all states) was levied on on-road price. With the advent of GST, the common tax rate would bring down the effective tax rates for automobile companies which will improve their operational efficiency. This would mean reduced consumer prices as there is no cascading tax effect.

Effect of demonetization on Auto sector

Sales are reported on a monthly basis in the Auto sector. Post demonetisation it was seen that the sale volume of the auto companies dipped by around 5.48%. The rural demand for the sector would be affected in the coming quarter or two, mainly because a lot of NBFCs and banks refrain from giving auto loans to the rural population. This means most of the payment for the purchase of automobiles is made by cash, and this cash crunch would have an impact on the top lines of the companies for a shorter term but this is expected to improve once the effect of demonetization subsides.

Impact of Budget on Auto sector

The budget overall has been consumption positive. Reduction in income tax rate for a taxpayer with income INR 250000-500000 translates into increased disposable income. The spending on agriculture and crop insurance scheme will benefit the tractor and the 2-wheeler segment. Increased spending on infrastructure, on the other hand, will benefit the commercial vehicle segment. However, the decrease in the total outlay of AMRUT will lower demand for buses and would adversely affect urban players.

Proposal Impact Major players
Spending on agriculture and crop insurance Positive for tractor and 2W Hero
Bajaj
Decrease of  6% outlay on AMRUT Negative for urban players Eicher Motors
Ashok Leyland
Tata Motors


Market reactions of companies to Budget

Company Pre-budget price Post-budget price Change % change
M&M 1255 1260 0.40%
Eicher Motors 23174 23385.9 0.91%
Ashok Leyland 92.32 94.5 2.36%
Escort 362 379.5 4.83%
Bajaj Auto 2819 2808 -0.39%

Market reactions have been positive for four out of the above five companies. The Auto sector is likely to be positively impacted both by value and volume. And the Union budget is expected to be a helping hand to the demonetization affected Auto players.