GST delay may not impact markets

IMAGE: One reason for going slow is because the GST Bill is still under discussion. Photograph: PTI Photo

Although the markets could see a knee-jerk reaction, they rule out a sharp fall.
Puneet Wadhwa/Business Standard reports from New Delhi.

Even as the central government hurries to get the states on board to meet its deadline for its ambitious Goods and Services Tax (GST) Bill rollout by April 1, 2017, recent developments indicate a possible delay.

The deadlock between the Centre and states comes amid the former's clamp demonetising of Rs 500 and Rs 1,000 notes in November. While Parliament's winter session concludes on Friday, the GST Council will meet again on December 22-23 to build consensus on these issues.

How are the markets likely to react to a possible delay in rollout?

Analysts say the markets have already factored in a possible delay in the GST rollout.

April 1, 2017, was an ambitious target to begin with, given the complexities involved in the Bill.

Although the markets could see a knee-jerk reaction, they rule out a sharp fall.

"The GST rollout is a complex process, and at least I did not expect it will be on time. The delay will not impact the market. The immediate concern for the market is the demonetisation impact on corporate earnings," says G Chokkalingam, chief executive officer of Equinomics Research & Advisory.

"In my opinion, events like delay in the GST rollout, rate hike by the US Federal Reserve or even a rise in crude oil prices will not create any fear or panic-like situation. I don't expect oil prices to breach $62 to $63 a barrel. Even the possible hike in rates by the US Fed has been discounted," says Chokkalingam.

"I expect corporate earnings to be bad in January, given the impact of demonetisation. Though I don't expect a crash even then, a 2% to 3% correction is not ruled out from current levels. The stability of currency and aggregate demand improvement should only happen in the March 2017 quarter, which will also help markets stabilise," he adds.

Despite headwinds, foreign brokerages remain bullish on India from a medium- to long-term view.

Morgan Stanley analysts say India's low-return environment could improve in 2017 because of better equity valuations, bottoming of the growth cycle (disrupted temporarily by demonetisation) and higher correlation with world equities on which they are more constructive.

'Equities are likely to deliver 15% return in 2017, compared to a -3% in 2015 and 2016. India is one of our top emerging market picks. We are overweight on consumer discretionary, financials, technology and underweight on staples, energy, industrials, telecoms and utilities,' says Ridham Desai, head of India research and India equity strategist at Morgan Stanley, in a co-authored report with Sheela Rathi.

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GST Council to look at solutions to turf war

Random 5% assessees may be chosen by a computer programme and divided between the Centre and states.
Dilasha Seth/Business Standard reports from New Delhi.

The Goods and Services Tax Council will look at a slew of options to iron out the differences between states and the Centre over administrative control over assessees.

The next meeting of the GST Council is scheduled on December 22 and 23.

Disagreement over this issue is threatening to derail the indirect tax reform, which the government plans to roll out from April 1 next year.

One of the options that the Council will look at is the random choosing and division of 5% assessees between the Centre and the states, using a computer programme.

The parameters on which the assessees will be chosen would be in-built in computer software, written for this purpose.

"The draft laws have provided for some options to implement cross-empowerment. There is also near unanimity between the Centre and states on cross-empowerment," said an officer aware of the development.

The Centre is likely to recommend dividing randomly chosen 5% assessees, picked by a system for audit and scrutiny in the beginning of the year, instead of a turnover-based division, which is technically called horizontal division.

"In income tax, the assessees do not know who the assessing officer is. There could be something similar in GST as well," the officer added.

While the Centre and states agree that there should be no dual control, there are differences over division of powers between them.

States want sole administrative control over assessees with an annual turnover of up to Rs 1.5 crore (Rs 15 million) and division of control or cross-empowerment over that.

The Centre is pressing for cross-empowerment for all assesses. It will be recommending a division of just 5% assessees to be scrutinised.

"There should be no human interface. Only 5% assessees will be picked randomly for scrutiny or audit by a computer-based GST network, which could be divided between the Centre and the states," another senior government officer said.

The GST Bill has provided to do away with dual control over the same assessee.

"Under this, a central officer or state official will carry out assessment, scrutiny, audit and pass order under SGST and IGST as well for an assessee along with CGST."

Satya Poddar, tax partner, policy advisory group, EY, said that differences over the administrative turf between the Centre and states were basically a job security issue.

Under GST, central and state officials would need to help of each other. The former do not have the wherewithal to deal with small dealers; state officials have not dealt with service tax, Poddar said.

Also, there would be automatic checks in the GST, as there is a system of input credits on the basis of which a trail could be established, he added.

Administrative control has proved to be the most contentious issue in GST, delaying the finalisation of legislations.

While the sixth meeting of the GST Council on Sunday did not discuss the contentious issue, it is likely to be taken up in the next meeting.

Finance Minister Arun Jaitley said he has a few options in mind to resolve the issue.

The roll-out of GST from April 1 seems impossible now as the Centre will not be able to table it in the winter session of Parliament.

If the GST Council reaches a consensus in the next meeting, it will be tabled in the Budget session.

States, including Kerala and Tamil Nadu, are now pitching for a September rollout. Demonetisation has also taken a toll on GST.

Kerala Finance Minister Thomas Isaac said on Sunday there has been an erosion of mutual trust between the Centre and states after the high-value currency notes were suddenly banned on November 8.

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4 sectors least prepared for GST

While manufacturing companies began their groundwork in time, the services sector -- banking, insurance, media and entertainment -- are the laggards.
Viveat Susan Pinto and Ajay Modi/Business Standard report from New Delhi and Mumbai.

It is virtually a race against time for India Inc as the April 1 deadline for the GST rollout stares at them.

While companies have appointed consultants to advise them on GST, nothing much has moved beyond that especially with small and medium enterprises.

Large companies, however, say they can meet the April 1 deadline. Conversations with multiple tax experts reveal that not more than 40% to 50% of large companies are ready for a GST rollout on April 1.

"Manufacturing companies in categories such as consumer goods, auto, auto ancillaries etc were conscious of GST early on and did begin their groundwork in time. But the services sector such as banking, insurance, media and entertainment are not quite ready for an April 1 rollout," says Sachin Menon, partner and head of indirect tax at KPMG.

Retail majors such as the Future Group and Shoppers Stop say they have kicked off the process of being GST-compliant and can meet the April 1 deadline.

Nihal Kothari, executive director, Khaitan & Co, says one of the reasons for the slow pace of work on the part of companies is on account of the ongoing talks and deliberations between the Centre and states pertaining to GST.

"The dual control of assessees (tax payers) has not been resolved yet. This is a crucial issue. The GST Council meeting earlier this month was inconclusive because of this. The hope is that it will get resolved with the latest round of meetings," he says.

With nothing conclusive yet following the four-tier rate structure that was announced in November, company executives say it is difficult for them to move forward.

"The basic framework is there, but the software will have to be put in place and our suppliers and distributors will have to be made aware of the need to move to GST. All this requires time," says Sumit Malhotra, managing director, Bajaj Corp, the maker of Bajaj Almond Drops hair oil.

Anjana Ghosh, director, Bisleri International, says, "I am not sure whether industry is actually prepared for GST by April. The ones who started early may have an advantage, but there are many who don't have anything in place even now."

"One reason for going slow is because the GST Bill is still under discussion. My guess is that the fence-sitters will get serious the moment the Bill is cleared in Parliament," Ghosh adds.

The big challenge is that the tax implications in the GST regime have to be wired into the enterprise resource planning (ERP) systems of companies, which is only possible when the final law is out.

"All this has to be coded into the software. Without the final law, it is impossible to compute what the tax implication of various transactions will be," says Suresh Nair, partner, indirect tax, EY.

There are more parts, Nair explains, to the jigsaw puzzle, such as "who will assess you, which slab your product will fall under, what is your jurisdiction etc. Once the final law is in place, then only can companies make the next leap in terms of their GST preparedness."

Despite the challenges, some companies remain optimistic. "I had the benefit of shifting to India last year from Malaysia, which happens to be the last country to have moved to GST," says Roland Folger, managing director and CEO of Mercedes Benz India.

"Since October last year, we have been preparing ourselves. We have an external partner helping us to be GST-ready. Our component suppliers and dealers are also getting ready. We are conducting training sessions for them," Folger adds.

Ajay Seth, chief financial officer, Maruti Suzuki, says the company has an internal cross-functional team that has been working on various aspects of GST compliance.

"We are configuring our business processes, IT and ERP solutions based on clarity available on GST," says Seth.

"A rollout plan for migrating to GST has been prepared," he adds, "which includes an impact study, managing transition, changes required in IT network and training, etc."

G N Gauba, chief financial officer at Motherson Sumi, says: "Most of our tier-II and -III suppliers follow similar systems like us and, therefore, should not have a problem to migrate to GST even as we do it. We have a group-owned IT company with which we have been working on the IT aspects of GST."