One Nation, One Tax- Yay or Nay?

The NDA Govt – as part of the most prominent reform since Independence – rolled out the much awaited Goods & Services Tax reforms on the 1st of July, 2017. In this blog, we will understand why GST could not be the uniform tax NDA Govt was aiming for, we will also access the impact of the GST, how will it affect your pocket, the likely challenges the assesses will face while filing the GST taxes which is termed as “The Tax Maze” and ultimately what stocks should you look out for to plan your personal investment decisions.

What was the current problem Indian economy was facing? For consumers, India’s GST is one tax in the most practical sense that currently a bar of soap costs, theoretically, 29 different prices across 29 different states due to 29 different state VATs. Under the GST regime, there’s just one GST rate for a bar of soap. Where India differs from other countries that have implemented GST is that there isn’t one single rate that applies to all goods or services. For example, in Singapore, the tax levied on a pair of shoes and the tax levied on a bar of soap is the same – 7%.

Here’s a quick comparison of rate structure in India as compared to a few selected countries who have successfully implemented GST earlier.

Country Tax Rate
India 5%, 12%, 18%, 28%
Singapore 7%
Malaysia 6%
New Zealand 15%
Aruba 1.5%
Brazil 7%, 12%
Germany 19%

However, the one nation one tax regime was not quiet achieved as the NDA Govt had to factor in the fact that the poor were to be protected from the high rates & a set of political considerations which includes vote bank. In India, the GST council has come out with a rather unwieldy four-rate structure: 5%, 12%, 18% and 28%. In addition to this, there is the exempt category (0%) and additional cesses that are charged on top of certain products, which makes our GST regime have seven effective tax rate slabs.

What will be the macroeconomic impact of the GST rate structure?

 

The impact of GST was anticipated to provide an increase in the GDP growth rate by close to 2-3% provided the GST tax structure was comprehensive. However, witnessing a significantly complicated structure as ours, I suspect that the the GDP growth would not be more than 0.5-1% as compared to the current growth rates. The reason being the complexity of multiple tax rates and continuation of the various exemptions.

A recent analysis by HSBC shows that the roll out of GST is likely to add only 0.4% to GDP, “lower than earlier estimates as multiple tax rates and exemptions announced… are far from an ideal structure and could blunt the growth impact of the reform process.”

Sectoral Impact?

The GST benefit to a certain sector depends on the following two factors:

  1. The actual rate of taxation
  2. The extent to which the operating costs of a particular sector are eligible for the input credit

If a particular sector has higher tax rates but has significant amount of the input credits, the sector shall actually reap the benefits of lower operating costs.

Following is quick synopsis of the critical sectors and the likely impacts:
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Filings Maze!

Businesses will have to undertake 37 annual filings (three a month plus an annual return) for each state the firm operates in. The basic problems for most small and informal businesses are similar: operating costs are about to go up as business owners hire accountants and computerise their operations. Anecdotal reports show that small firms with revenues of below Rs 1 crore could have 20% to 40% of their existing profits go towards GST compliance costs and higher tax rates. Thus, the overall operational costs might push the overall profitability southwards in the medium term. However, once the processes are streamlined, the growth rates might increase but the improvement comes with a significant gestation period.

Joblessness?

GST is deemed to be a bridge to convert the unorganized sector into an organized form. However, it’s largely unclear at this point what extent of small businesses will simply become unviable post-GST. A recent report is not optimistic on what the new GST regime will do for job creation. We note that unorganised sector employs a majority of the labour force. With the unorganised sector shifting to the organised sector, a significant labour absorption capacity that currently exists may get eroded. This can compound the already chronic problem of job creation in India.

Markets Trajectory?

The stock markets have advanced significantly and have taken a positive cue from the fairly smooth roll out of the GST reforms. There were 2 advancing stocks for each decline in the markets for the week so far. However, the markets are expected to be jittery in the medium term as the turmoil regarding the GST filings and the infrastructure glitches.

The markets are expected to drop to the 9400 levels due to corrections. However, the technical indicators of Fibonacci extensions suggest that if the Nifty crosses the 9706 mark, the markets will turn bullish in the medium term. The data currently suggests that the markets are overpriced. Here are my picks for a medium term investment goal to watch out for on corrections:

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What does it mean for YOU as a consumer?

  • Day-to-day essentials are largely exempt from GST
  • Banking and telecom services will get more expensive
  • Eating out to be cheaper if you eat at a non-air conditioned restaurant
  • Luxury cars, which will get cheaper
  • Movie tickets, especially regional cinemas, will get more expensive
  • FMCG products will be cheaper

Anti-profiteering

For instance, soaps and toothpaste are supposed to get cheaper after the rollout of GST. They currently have an effective tax rate of 24-25% and after GST, this will come down to 18%. However, if as a consumer, you have always been paying say Rs 75 for a tube of toothpaste, it’s highly unlikely that the company that sells you the toothpaste or bar of soap will make it cheaper once you’ve gotten used to paying Rs 75.

To solve this potential problem, the GST legal framework creates an “anti-profiteering authority” that will check whether businesses are passing on the benefits of the new tax regime to consumers. Legal experts and industry leaders have almost unanimously declared that this anti-profiteering body will spark a minefield of litigation and prove to be problematic.

Conclusion

GST roll out on time and with ‘just enough’ infrastructure is a bold move by the NDA Govt. I do agree with the fact that the awareness approach could have been better. On a consolidated basis, the end consumer may not be the most benefiting entity in the economy. The businesses will be definitely benefited from the GST structure. However, there are a few aspects where the NDA Govt must act in the coming years. Once stabilized, the NDA Govt must try and unify the existing 4 rates as the economy starts witnessing the long term benefits of the GST regime.

Thank you. 🙂

Opinions and counters are encouraged!

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Demonetization – NDA’s Smart Move Towards Dismantling The Parallel Economy

On the 9th of Nov, 2016, the NDA Govt came out with an announcement of the discontinuation of the Rs 500 and 1000 currency notes. The news created great discomfort and unrest amongst the people. The move was in the wake of increasing black money and counterfeit notes in circulation. The topic is of immense interest since this move is going to impact the several sectors of the economy and the way policy decisions are approached. I would like to bring out the overall meaning of the parallel economy, the causes, the key commodities which lead to the creation of the parallel economy, the cost that RBI will have to bear because of the decision and further a set of comments on the cost-benefit analysis of the decision from a central bank perspective in this blog. In addition to the above, I would also like to bring out the effects of the Govt’s decision on the near future RBI Monetary policies in the context of the rate and the liquidity, the likely near-term effects on the stock markets, liquidity management of the banks, the effects on real estate, MFIs etc. Let us look at the overall situation and a quick impact analysis on the same.

The parallel economy has been a critical pain point for the NDA Govt to function smoothly. A Parallel economy, based on the black money or unaccounted money, is a big menace to the Indian economy. It is also a cause of big loss in the tax revenues for the government. The Indian economy has grown by 30% in the last 5 years whereas the high value denominated notes have gone up by around 90%. This essentially indicates that the transactions which take place are largely in cash and are unaccounted for and that eventually leads to a creation of a parallel economy and all such transactions do not contribute to the net GDP thus creating hindrances to the growth rate. In order to take a stance against this, the NDA Govt decided to discontinue the old currency notes and replace them with new so that the parallel economy transactions reduce significantly or might come to a stand still in a bit.

Key cause of Parallel economy creation:

  1. Tax Evasion
  2. Cash transaction in trade and services
  3. Corruption
  4. Equity market manipulations
  5. Real Estate etc

Key Investment Avenues for such lump sum cash:

  1. Gold
  2. Informal lending/deposit market
  3. Real Estate

 

Effects on the Monetary Policy:

The Reserve Bank of India may have to change the policy course amidst removal of high value notes as the huge accretion in deposits will increase the overall liquidity in the system. In this situation, the RBI might have to sell out bonds to suck the additional liquidity in the system. The high liquidity in the system shall lead to cheaper loans thus boosting inorganic growth. RBI may want to minimize such impact if any. The additional CASA deposits shall lead to low rate deposits thus leading to cheaper lending with a lagging effect of about 2 quarters.

Sectoral Effects on the Economy:

  1. Real Estate – With lower interest rates in the near future and a liquidity crunch in the real estate sector, home prices might come down by about 20-25% in the medium term.
  2. E Commerce – Reduction in cash transactions has already forced amazon and flipkart to discontinue their cash on delivery services thus impacting their reach and business in terms of the overall sales.
  3. Infrastructure – The sector might face immediate heat since most of the payments to the labourers are made in cash
  4. Agriculture – Agri might face immense negative impacts since the trade largely is carried out on cash basis including the purchase of seeds and fertilizers. However, the impact will be short-lived.
  5. Housing Finance Companies – Sector finance companies shall have opportunities for higher demand amidst lower home prices. However, it might face the heat in terms of the overall credit quality where the lending has been largely for low-income groups.
  6. Banking – Banks/NBFCs shall be benefitted since a large sum of low-cost deposits in the form of CASA accounts shall be accumulated. However, liquidity management and efficient operations shall continue to pose challenges to the banking institution at least till December.

Market Outlook:

The markets shall continue to be volatile in the short-term and significantly jittery in the medium term. The markets are yet to price in the effects of the sudden decision but we can the markets to neutralize by the end of the month. However, the long-term outlook shall be bullish as far the demonetization impacts are concerns. Ultimately, the markets will take their own course based on the likeliness of the future events. Nifty should rise back to the 8500 levels by November end is the majority consensus so far.

Cost Benefit of De-monetization (RBI Perspective):

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Total Cost of Printing Vs Demonetization Benefit Comparison

What the above numbers mean is that the cost for RBI to print new notes shall be close to Rs 62 Billion. The Govt, on the other hand, has targeted to demonetize around 170 Billion. Assuming 100% success, the Govt shall be demonetizing close to 170 billion which is as good as three times the cost the Reserve Bank shall bear to make a smooth transition. It largely is a benefittin trade-off for the Govt as well as the RBI.

The decision of the NDA Govt is one of the most prominent moves of the decade towards making India a better country in terms of growth and transparency . However, the approach of the Govt in handling this chaotic situation smartly will drive the near future results. The Reserve Bank on the other hand, will have to make sure they keep mopping up the additional liquidity in the system and intervene when required to ensure the financial stability of the system. India has clearly welcomed this decision as far as the reactions all over are to be considered. It will be challenging to see the handling of the outcomes that evolve from the decision taken. Hopefully, this should be the fresh start towards making India a more transparent, efficient and the fastest growing emerging economy. If not complete eradication, this will definitely reduce the overall impact of the parallel economy and transfer the reduction as a contribution to the real economy growth rate. I hope as citizen, we will make an effort to ensure the new notes being printed are not soiled by writing on them or keeping them in unhygenic conditions as it adds huge cost to the Govt and the Reserve Bank.

I would love to know the diverse views of the readers as well. Thank you. :).

 

 

The Decisive Session

The parliament winter session (the decisive one) commenced on the 26th Nov, 2015. Parliament will hold the meet till December 23rd, 2015.  The session agenda includes 19 Bills currently pending in Parliament for consideration and passage (including the GST Bill).  14 new Bills are proposed to be introduced. Out of these one will also be taken up for consideration and passing.  Two Bills will be withdrawn. With a fairly stable signals so far, the winter session productivity does seem to be significant with close to 73% productivity. In this blog, we will focus on the productivity of upper house and the lower house in terms of results as well as the time spent. We will also focus on GST and the progress so far including the Arvind Subramanian committee recommendations. Finally, I will also conclude with the likely outcomes of the session, its effects on the GDP growth and the direction of the markets in the medium term.

For the readers, here’s what I discussed about GST in detail in one of my previous blogs:

ALL YOU NEED TO KNOW ABOUT GST

Lets first understand the major bills that will be due for discussion in the session. Here’s is a brief note on the same.

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The productivity of the sessions has been a significant driver of the reforms and development in India. However, history suggests that no session of the rajya sabha apart from the budget session has been productive. In the NDA Govt tenor as well the history has repeated itself with low productivity in the monsoon session. GST has been facing strong opposition for the structure of the bill. To get a sense of the productivity and performance against the plan, here are a few images that might help to give a clearer picture. 

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Total Productivity of Rajya Sabha in the Budget Session
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Total Productivity of Rajya Sabha in the Monsoon Session
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Productivity of the winter session as on 30th November, 2015

 

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Budget Session – Plan Vs Performance
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Monsoon Session – Plan Vs Performance

While productivity has been one of the issues, the strong opposition to the GST passage is still a concern for the NDA Govt. GST has been facing an opposition in terms of the structure, exclusions and inter-state tax. With 3 committees already publishing their recommendations, opposition was persistent with their demands. NDA Govt thence decided to form a committee headed by the Arvind Subramanian(Chief Economic Advisor to the PM). The key recommendations of the CEA led committee were:

a) Recommends eliminating all taxes on inter-state trade.

b) GST panel has suggested standard rate of 17-18%

c) Panel not for specifying GST rate in Constitutional Amendment Bill

d) Panel recommends bringing alcohol, petroleum within GST

e) Committee suggests revenue neutral rate of 15-15.5% for GST

f) Allocation to states will depend on revenues raised by Centre and states

g) Two options for the states: Single rate of 15% or a range of 17-18%

h) GST rate on precious metals to be in the range of 2-6%

i) Panel recommended removal of 1% additional levy

j) Higher GST rates on tobacco, luxury cars, pan masala and aerated drinks

k) The panel kept alcohol, real estate out of GST to achieve 15% rate

The NDA Govt will now be again presenting the GST bill with the required changes if they accept the CEA recommendations. If the NDA Govt succeeds in putting up a viable solution for the oppositions demands, it would truly make GST, one of the biggest reforms since independence in India. Although, the hopes are slightly on the lower side, things might change from here on if a mutual motive is maintained. The silver lining of the winter session was the passage of the Real Estate Regulatory Bill (2015) today, which is intended towards consumer protection and might be a way to maintain the market dynamics in this era of sky high real estate prices. One of my blogs might give readers a fair idea about the Real Estate Regulatory Bill.

Real Estate Regulatory Bill

To conclude, the path towards the GST passage looks rough for the NDA Govt so far. It might be right to say that the winter session might not give be able to deliver the said reforms. The non passage of GST will definitely be a huge setback for the Govt and might affect the GDP in the coming future due to the leading weak investment sentiments. On the other hand, markets with significantly low hopes about the GST passage, might head south in the medium term (Uptil the first quarter of FY 2016. Markets look volatile in the short term and might continue to be the same at least, till the US Fed meet due on the 15th of this month. Markets will be looking forward to the Budget session for a push in the reforms from here on, if at all the winter session turns out to be an unproductive one. It would be the appropriate time to move things forward in terms of reforms and use the current conditions of low commodity prices to our benefit.I hope, the Center and the opposition will start putting up a few actionable steps in place for the betterment of the economy on a macro level, rather than hinting a political vendetta. 

Thank you. 🙂

 

 

GST – So near, yet so far…

Goods and services tax is finally running its last lap. But it has not reached this stage without hurdles. It has been facing various problems to get implemented right from the time it was mentioned in the 2006 budget for the first time.

In India, the powers to levy taxes is divided between the states and the centre. There are lists which define who is to levy taxes. In some cases the entity comes under a common list thus creating multiplicity of taxes and substantially adding to the compliance and administrative costs for businesses. All of this calls for the need of a comprehensive way of taxation which is being brought in the form of GST.

Goods and services tax is a single tax rate on any supply of goods or services or both. The GST will wipe the indirect tax slate clean, replacing around a dozen indirect taxes and excise levied by the state and the centre. It is a courageous step to reduce the current tax complexities, encourage tax compliance, and streamline the system of tax credits. Although courageous, we are pretty late in implementing this reform compared to the rest of the world. More than 100 countries have already implemented these.

GST, as far as the implementation is concerned, will be decided on the basis of a tax rate to be levied. This tax rate to be levied is termed as the Revenue Neutral Rate (RNR). RNR is the rate at which there will be no revenue loss to the states after GST implementation. RNR is decided, bill is passed, everyone is happy right?? That does not seem to be the case so far. Calculating the RNR and finalizing a value which is acceptable to all the stakeholders seems to be a challenge. The Ministry of Finance had given the task to a few committees to come up with a rate for the same, bifurcated as state rate and central rate. The picture looked something like the given below table.

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The suggestions of empowered committee were void since the RNR of 27% is too high, while the 13th finance commission rates were way too low. If the rates are too low or too high, they would have to face opposition from states as well as consumers and industries. Mr. Finance Minister has so far indicated, based on a consensus, that the GST rate will be somewhere in the range of 21-27% which will be subject to agreement by all the states. Many experts believe that RNR less than 25% might lead to revenue loss. Despite what the RNR is decided, GST will definitely reduce the cascading of taxes to a great extent and would help in increasing the GDP by 0.9-1.7% from the current growth rate.

Although GST, India’s most ambitious tax reform, is being implemented with slow pace and is likely to be rolled out next year, a lot of roadblocks still remain as a challenge. Following are a few :

  1. Passage of the bill in the Rajya Sabha (as it is already is cleared in the other house) and ratification by at least half of the states.
  2. Arriving at a RNR and a minimum threshold level
  3. Deciding on the goods and services and exclusions if any.
  4. Formulating “place of supply”, so as to determine the point at which tax is to be charged
  5. Most important and crucial, is the designing of an effective information technology infrastructure and enable the credit flows

India is a country that thinks too much and is hesitant to implement it. There are around 132 countries who have implemented the GST with different names and in different forms. But are all those GST reforms perfect?? As a matter of fact, they are not. They have implemented them with certain predefined form and are improving based on the experiences witnessed. Sometimes the best way to achieve something is to just implement it first, and then go on improving the same. Anyway, despite all the roadblocks, it’s always important to be optimistic enough to believe that the GST will be rolled out next year and India will become the fastest growing emerging economies, probably. Lets hope the bill is passed in the monsoon session of the rajya sabha where the NDA Govt will have to face some more opposition stunts.

Thank you. 🙂

NDA Govt..Has it Fared Well so far ??

NDA Govt will complete a year in power on May 26th. It came in power with promises to implement some reforms that will make India one of the fastest growing economies.. The productivity and number of hours spent in the sessions seem to be promising from its rosy figures. But how far have they been able to keep up with their promises is still not clear from its actions so far. Hope you will get a clear look on whats been done and whats not!!

Modi

Here is a list some of the key Bills that are under consideration:

  1. The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 (Goods and Services Tax)
  2. The Insurance Laws (Amendment) Bill, 2015
  3. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015
  4. The Andhra Pradesh Reorganisation (Amendment) Bill, 2015
  5. The Motor Vehicles (Amendment) Bill, 2015
  6. The Coal Mines (Special Provisions) Bill, 2015
  7. The Mines and Minerals (Development and Regulation) Amendment Bill, 2015
  8. Citizenship (Amendment) Bill, 2015
  9. The Public Premises (Eviction of Unauthorised Occupants) Amendment Bill
  10. The Black Money Bill (Money Bill)

Each bill has to be passed in both the houses of the parliament, the Lok Sabha and Rajya Sabha. NDA with majority in Lok Sabha will have minimal troubles of getting them through. Although, in Rajya Sabha it looks a little difficult to get the bills through for approval ( having a strength of 47 out of the total 245 seats). It’s important to note that rajya sabha approval is required for bills which are not introduced as money bill(ex Black Money bill). Thats why NDA should be credited to roll out the black money bill. Black money bill although has been passed by Lok Sabha and is bound to be cleared by Rajya Sabha. Black money bill although has been passed by Lok Sabha and is bound to be cleared by Rajya Sabha. NDA has so far passed most of the bills. But GST might have to wait for a while more to be passed in the Rajya Sabha after recently being passed from the Lok Sabha. GST has recently been referred to a select committee for legislative scrutiny. The road ahead for GST and land reforms seems tough with a strength of 47 seats in the Rajya Sabha.

Overall speaking, the NDA Govt has fared well in the past year with some hurdles because of the strong opposition. But they seem to bring in the required reforms of GST which are proposed to be rolled out next year. NDA has sure shown signs of reforms from making GST a success story in Lok Sabha.The way forward is tough for the Govt but if they convert this hurdle into an opportunity, NDA will be credited for introducing the biggest reform(GST) after 1947 for the development of India as the fastest growing economy.

Next up is all you need to know about GST and the way forward for it to be rolled out next year. Do read. It will be very informative in nature.

***Heres something about what do you do when you have to vote the next time. Most of us are not aware of this *** 
Next time when you vote, visit this :http://www.prsindia.org/ …check out your constituency’s MP track record and how has he performed during the session, has he asked the right questions, has he put up some issues of his constituency..and more to read about them..Do visit.. It might make us more aware about how things are and whom should we vote the next time 🙂

Thank you.