Edelweiss report on GST

"Edel pulse": The shift - Analysis Beyond Consensus

In our continued efforts to deconstruct GST and its impact along with the metamorphosis to formal economy, our recent interactions with tax experts and industry participants reinforced our stance of a new order setting in (refer our report).

Key findings: a) capping of cash transactions at INR0.2mn in the Budget has forced the unorganised players to transact more via formal channels; b) proposed GST rules (particularly reverse charge mechanism and e-way bill) will enhance compliance; c) enforcing anti-profiteering clause would be a challenge; d) GST will increase working capital, though marginally; and e) the government is more prepared than industry for a July 1 roll out.

A negative could be potential inventory liquidation in some sectors at dealers/distributors level, though a short term phenomenon. We reiterate that long-term benefits of GST will far outweigh near-term hiccups, and the government’s resolve to curb black money will see structural changes in the economy and shift trade from unorganised to organised players.

Cash cap has spurred banking / digital transactions

Recent budget changes prohibits cash transactions over INR0.2mn (including personal/business purpose, capital/revenue) in a bid to curb generation and holding of illegal cash.

Further, the act imposes penalty (equivalent to cash received) on the recipient of cash in excess of the said amount. The act seems to be effective as our interactions indicate that the unorganised sector’s transactions via banking channels have surged post April 1, 2017. This will only hasten the shift towards organised sector.

Pivotal recommendations bound to bolster formal economy

Proposed GST rules include: a) reverse charge mechanism on purchases from unregistered dealers; and b) requirement of e-way bill for movement of goods worth INR50,000. We believe, these measures will check unauthorised movement of goods, prevent tax evasion and improve compliance in the long run. However, several dealers/ distributors cited significant near-term challenges pertaining to e-way bill rules.

Inventory destocking likely to cast a shadow on Q1FY18 sales

Our channel check indicates uncertainty on tax rates and input credit will lead to possibility of inventory destocking ahead of GST rollout in most B2C sectors like building materials, agrochemicals, auto ancillaries, electrical equipment and FMCG sectors.

GST rate: Potential winners and losers

Building material, FMCG and multiplexes may witness low tax rates, while herbal FMCG products, jewellery and telecom may be see higher tax incidence.

Anti-profiteering clause enforcement: Easier said than done

The anti-profiteering clause mandates GST benefits (either lower tax rates or higher input credit) to be passed on to consumers via lowering of prices of goods/services. We perceive several challenges (including reference point for comparison, product prices are influenced by multiple factors and tax is only one such factor) in enforcing this clause.

Benefits to outweigh burgeoning working capital dampener

Under GST, the entire tax will be paid on supplies versus the current tax structure wherein only excise duty is paid on removal of goods and VAT/CST on sale. GST will be applicable on stock transfers and advance payments, while units enjoying area-based exemptions will have to pay entire GST and subsequently claim refund. This may increase working capital of companies with high inventory or entailing units enjoying area-based exemptions. However, we envisage the impact to be marginal and offset by long-term GST benefits.

Government geared up for July 1 roll out; industry lagging

The government is well equipped in terms of IT infrastructure, security, approval of third party service providers, assisting states, etc., to keep its date with GST roll out on July 1. Though GST registrations have picked up pace across the country, our interactions indicate that the industry and trade are lagging significantly in terms of upgrading IT systems, planning and understanding the new tax rules & regulations.

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