GST article in Business Today - July 2017

GST impact: Business class can't avoid paying taxes; prices of most consumer items to come down

R.Kannan   New Delhi     Last Updated: July 7, 2017  | 08:24 IST

The Goods and Services Tax (GST) is a path-breaking change in the world's tax system. This type of large change was not effected in any part of the world earlier. The system will take two-three years to stabilise. In the beginning, there will be a lot of issues and several stakeholders, including state governments and industry associations, are not certain about the effects of GST on their finances and business models. Once it is introduced, there will be several changes in rates and classifications of commodities and services. The government has already set up an organisation to address the teething problems regarding GST.

Impact on the economy

GST is likely to bring many of the entrepreneurs, who are not paying taxes today, under the tax net and increase the government's revenue. Further, the transactions happening in the parallel economy will be captured in official statistics, resulting in higher GDP. It will increase tax collections and reduce the budget deficit, and the government will be able to spend more on economic development.

In the financial year 2016/17, services constituted 53.8 per cent of the Gross Value Added (GVA). Now, an increase in service taxes by 3 per cent will see an increase by Rs 40,000 crore. With an expected 10 per cent growth in services within the economy, service tax collections alone can go up to Rs 75,000-1,00,000 crore, a very large increase over the previous year. The cost of services provided by banks and non-banking financial companies (NBFCs), telecom companies and housing societies will also go up. There will be an increase in cost to the customers.

Impact on the consumers

In more than 50 per cent consumer goods, the cost is likely to come down. In case of services availed by the consumers like telecom, banking, financial Services, online shopping, insurance, eating out, airline travel and housing society, charges will go up. Consumers will have to brace themselves to pay higher bills for services availed. Since there is no pass through for fuel, they are likely to remain the same. Television, movie tickets, processed food and cement are likely to become cheaper. Car buyers can rejoice as the mid-segment cars will be neutral under GST. Small cars are likely to become cheaper. However, luxury or SUV cars are set to become expensive. Wherever the manufacturers see reduction in costs, they have to pass on to the consumer under the anti profiteering rule. Overall, the customer should see a net gain.

What it means for large corporate houses

As an anti-profiteering provision has been made, large companies have to pass on the saving in any of the costs due to the introduction of GST. In case the costs go up due to supply chains not being ready with GST registrations and filings, the costs will either have to be absorbed or have to be passed on to customers. However, no corporate can increase profits on account of GST. In the next three to six months, due to the uncertainty in demand and change in distribution models, inventory is likely to go up, and the working capital requirement is set to rise, which is expected to increase the cost of funds.

Several companies have availed investment benefits, which were for a 10-20 year period, and it is not clear how the transfer of benefits under the new system will pan out.

Will SMEs suffer?

Small and medium businesses have also been brought under GST. Here, the tax will be uniform for all and it will increase cost at the point of supply. As all transactions will be captured in the GST regime, it will have an effect on additional tax collections under the income tax. According to a provision, if the turnover is less than Rs 20 lakh per annum, there is no need for registration and payment of GST. However, many small companies are suppliers to large companies, and they have to register under GST if they want to continue with it.

Today, the distribution of goods is organised in sync with the rates asked by the states and the warehouses. As the rates will be synchronised now, there will be no need to keep so many clearing and forwarding (C&F) agents across the states, and warehousing and distribution could be optimised. This move will lead to consolidation of fragmented industries, and many small and medium industries will have to be consolidated.

In the short run, there will be a lot of issues and the small and medium enterprises will require guidance from the government and large buyers. In the long run, GST would be beneficial for all stakeholders, and it will be good for India's economic growth.

R. Kannan is Head of Corporate Performance Monitoring and Research, Hinduja Group

NPA article in Moneycontrol in May 2017

May 18, 2017 12:13 PM IST | Source: Moneycontrol.com

NPA ordinance – An innovative approach to faster resolution

Any delay in resolution reduces the value of assets, increases the cost and keep the capital locked for a long time.

   

R Kannan 

Global Economy is yet to regain the normal after the 2008 economic crisis. Banking system across the world was affected by the global melt down and the Non-Performing Assets (NPA) in many countries in the world witnessed a sharp rise from 2008. The economies across the world are still pursuing the path of recovery.

In the last few years, Indian Economy’s integration into the world economy intensified and 2008 crisis also had an impact on Indian Economy and its performance. This has affected the banks in both Public and Private Sectors. Since lending by Public Sector was more to the sensitive sectors, Public Sector’s NPA level was much higher than the norms.

To strengthen the banking system and to increase the transparency levels, RBI brought new rules on provisioning and the banks have to provide higher provisioning compared to the earlier norms. Adopting this new rule resulted in reclassification and higher provisioning by banks for Non-performing assets.

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Considering the India’s high economic growth, the sectors affected will see an upturn in the coming years and will return to black. In India, many mechanisms are available for resolution of NPA’s and Government and RBI are bringing innovative approaches to resolve NPA’s from time to time.

One of the issues for faster resolution of NPA’s was the fear of future investigation on resolutions arrived with the borrowers. The other was the way the Joint Lender Forum meetings were held and the decision taken in these forums. This was a slow process and this resulted in funds being locked up and not earning any income for the Banks.

The Government’s decision to give powers to RBI to arrive at resolution in individual cases is an innovative solution. RBI also relaxed the conditions for decision making at the JLF meetings. The Advantages of RBI taking the lead are -

a)The time taken for resolution will come down

b) RBI has the information about all the borrowers in all the banks and it is easy to consolidate and arrive at a single view of a borrower’s total borrowings with credit history.

c) When JLF meetings takes place, there is an independent body looking at the issue brings a fresh perspective.

d) Being the Regulator, It will be easy for RBI to coordinate with other resolution bodies in India; use their expertise, ascertain their views and bring in a 360 degree approach to resolve the problem.

e) The decision will be a joint one, where even RBI will be involved. In case of large borrowers, RBI can take the opinion of the Government also. This will bring comfort to decision makers in banks and they can decisions on resolution without the fear of future investigations.

Doubts are being raised about the effectiveness of this mechanism and how the judiciary will look at this process. In any such situations, where NPAs are very high, faster resolution increases the chance of higher recovery. Any delay in resolution reduces the value of assets, increases the cost and keep the capital locked for a long time.

Since the purpose of the mechanism is to expedite the resolution and release funds into the system, RBI’s role will be a catalytic one and collective decision of all concerned should be looked at with very positive approach by all concerned.

In Indian banking system, most of the lending is asset backed and in many cases, the borrowers are having large land banks and assets and they can cover the principal. In many cases, it would be possible to even recover 90 percent outstanding, when companies are owning lot of assets. In 2000, China had a NPA which was very large and they were able to bring the NPA’s from 40 percent of lending to respectable level today.

Doubts are being raised about, who will be the buyers of the assets on Sale. The leading Cash rich companies in each sector, Sovereign Wealth Funds, Pension Funds, Foreign companies, Foreign Investors, NRI’s are all waiting for opportunity to invest in India. Considering that India will grow at more than 7 percent every year, in the next few years and the likely increase in GDP growth on account of demonetisation and GST, investors are very bullish in India. The high GDP growth itself will aid in reducing the NPA.

Most of the Indian banks now focus on Retail customers, where the scope for large NPA’s is limited. Further the development of Indian Bond market and introduction of INVITs and REIT’s is going to help in reducing the future NPA. Most of the sensitive sectors, will use other funding channels / new financial instruments for executing their projects in future. Through further capitalisation of banks and higher growth in Banking, the NPAs will be back to normal level in two to three years.

Author is Head Corporate Performance Management at Hinduja Group

Hidden Strengths of Public Sector Units ( PSUs) in India – Nov 2017

PSUs in India have played a major role in building the Indian Economy and the Industrial Development in India. After the Industrial Policy of 1956, many new PSUs were created in India serving the strategic needs and forming the base for Industrial Development. In each of the PSU in the sector , the PSUs emerged as  leaders in the  sector.

After opening of the Economy in 1991 and emergence of competition, many of the leading PSU’s lost their charm and started making losses. They had lost their leadership position and became marginal in the sectors they were the leaders.

Even today, some of the units are able to maintain the market leadership and operate very successfully keeping their competitiveness alive. PSUs including the loss making ones have lot of hidden advantages and their intrinsic value is much higher than the accumulated losses and there is a good scope for turning around them.

1. Land Bank. Most of the PSUs have land banks in leading cities in India and their value far exceeds their book value. Some times, the value could be even more than 10 to 20 times of their book value. Capitalising the land bank by sale, lease and joint development will provide the required competitiveness going forward. The concepts of REIT’s and Invit’s could be explored. In case of sick units, the land bank could be capitalised, the loans repaid and there will be scope for payment of dividend and meeting employee liabilities. Some of the PSUs sitting on huge land include Railways, BSNL,MTNL and the leading Public Sector banks.
2. Assets at low historical costs. In many cases, the equipments are in operations ,even after the economic life is over. The assets are reported at historical costs. Their replacement value and market value are much higher than the value in the books. Even after incurring high maintenance expenses, still they are able to produce products which are much cheaper than others.
3. Social Infrastructure / Town Development / Social Development. The PSUs in many cases are mega enterprises. While they were being formed about one third of their investments were towards , development of town around factories, schools, colleges , hospitals. Apart from serving the commercial objectives , they also served the social and economic development objectives. They have good experience in managing townships , social infrastructure and played a key role in development of towns and communities.
4. High quality Talent. PSUs pay one of the highest salaries, in the sectors they operate today. The selection process in PSUs is very good and through competitive examination, they were able to attract very good talent. Once, they are in the system, the continuing education is given lot of importance and the personnel are deputed to attend the world renowned courses in the sector.  Whenever Private sector have requirements for high quality personnel, PSUs become the hunting ground.
5. Wide distribution network. The consumer facing PSUs have the largest distribution network in the sectors they operate. Competitiveness of an enterprise is determined by the reach a corporate has. The network can be effectively utilised for cross sale of products of other PSUs and the complementary products from other corporates. This can help to earn fee based income using the distribution network.
6. Transparent accounts. PSU accounts are subjected to audit at various levels and various stake holders are involved in close scrutiny of the operations. The accounts reflect the real financial status of companies. There is no incentive , even to hide losses.
7. Technology. PSUs are the first movers in technology adoption and in India, most of the spending on Hardware, Software and R&D happens in PSUs. As a result , they have some of the good technologies. Companies like HAL, NTPC, BHEL ,etc are known for good technologies.
8. Systems and Procedures . They have very good well defined systems and procedures. Starting from preparing a Perspective Plan, they prepare Corporate Plans and Annual Plans and budgets for many years now.
9. Engagement of leading Management Consultants. PSUs have taken the help of leading management consultants in the World, to prepare their growth strategies and they get the best inputs for preparing robust growth plans.
10. Capital expenditure. Even during the Crisis, the Capital expenditure was happening only in PSUs. Most of the mega  projects valued at thousands of crores are executed by PSUs. This also helped in maintaining the GDP growth rate.
11. Large dividends. Government being the largest shareholder or sole shareholder of PSUs, the dividend declared by PSUs has emerged as one of the major sources of revenue for the Government. The oil PSUs also pay huge taxes and help generate income for the government.
12. Government backing. They have a strong share holder, the Government, which can continue to support the new initiatives towards higher business growth.

In the light of the above, the PSUs which still have competitiveness , should draw up aggressive growth plans to preserve their competitiveness going forward in future. In others, scope for capitalising the above strengths to be explored. The PSUs having large land banks have to draw up a strategy based on capitalising the land bank without losing much time.

Considering the increased uncertainties in the Economic Environment, PSUs have a  role to play in stimulating the investments in the Economy and need to increase their competitiveness to become agile. This will happen through culture change and improving the decision making process. The response to the fast changes in the environment is the need of the hour. The best practices in Private sector in bringing good decision making process across PSUs and sharing best practices from best PSUs will go a long way in making the PSUs relevant in future.