Strategy: GST: Key changes - Kotak

GST: Key changes. The government's recent decision to (1) cut GST rates for certain goods and services, and (2) ease certain administrative procedures for smaller entities and exporters will reduce the cost and complexity of compliance for smaller companies. However, the decision to defer the implementation of the e-way bill to April 1, 2018 is a bit disappointing as it may encourage certain companies to continue to avoid payment of GST and defer the formalization of the economy to some extent.

Smaller companies to benefit from lower cost and complexity of compliance

The government's decision to (1) change the filing frequency for SME companies with annual revenues below Rs15 mn to a quarterly basis from a monthly basis, (2) increase the revenue threshold for companies under the composition scheme to Rs10 mn from Rs7.5 mn earlier and (3) defer the reverse-charge mechanism for transactions between registered and unregistered entities to April 1, 2018 will reduce the administrative complexities and compliance costs for the smaller companies. Recent changes were announced by the government to the GST system.

Exporters to benefit from faster refund of claims (e-wallet scheme from April 1, 2018)

The government's move to (1) issue refunds of GST paid by exporters from October 10, 2017 and (2) introduce an e-wallet system with automatic credit of a notional amount from April 1, 2018 will reduce the working capital issues being faced by exporters currently. Under the current system, exporters pay GST tax on inputs upfront and then claim refunds from the government, which results in significant increase in working capital for them.

Consumers and industries to benefit from reduced rates on certain products

The government's decision to reduce rates on 27 products will benefit consumers and industries alike. In particular, the government's move to cut the GST duty on manmade fibers and yarns to 12% from 18% will partly alleviate the challenges of the textile industry given the peculiar inverted structure in the industry with the GST rate on fabrics at 5% being lower than the GST rate on critical inputs (fibers and yarns) at 12% (18% earlier).

Formalization of the economy and sectors may take longer

The government's decision to defer the implementation of the e-way bill system to April 1, 2018 may result in (1) participants in the informal economy continuing to sell their products outside the GST system and (2) unorganized truck operators facilitating the movement of such 'undeclared' goods. In our view, the informal economy is still struggling to comply with the GST system fully given the concerns of the participants about the disclosure of their 'true' revenues and profits.

Source : Equity Bulls

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