GST DAY
Refer our latest updates on GST
12 September 2017
GST Day
Managing the transition to a new tax regime – an on-the-ground view
Our ‘GST Day’ event saw participation of stakeholders from across industries. We met with
(a) an indirect tax expert, (b) a participant from the tiles industry, (c) the CEO of Retailers
Association of India, (d) an adhesives distributor and (e) a major distributor of the largest
FMCG company in India to discuss their experience after India entered a new tax regime
under the Goods and Services Tax (GST). Key takeaways from our discussions:
GST is the single largest tax reform India has witnessed in its history, combining multiple
taxes into one broad framework.
For modern retail, GST is already proving to be a blessing. Longer-term prospects appear
encouraging too.
For manufacturers, the reform promises to be a longer-term positive. It should help
crack down on India's vast informal economy, driving trade in favor of the organized
segment. Categories where materials are imported or sourced from large suppliers
should benefit more.
However, any major reform is accompanied by some confusion in the initial months of
rollout. In case of GST, there appears to be lack of clarity over (a) division of GST into
CGST, IGST and SGST, (b) transition of credits, (c) route of return filing and (d) uploading
of forms with a large number of line items.
GST – a paradigm shift in tax structure
We hosted Mr Dinesh Kanabar, founder of Dhruva Advisors, and Mr Ritesh Kanodia,
partner at Dhruva Advisors, to understand their views on the Goods & Services Tax
(GST) and their experience as India transitions to a new tax regime. Key takeaways:
GST is the single largest tax reform India has witnessed in its history, combining
multiple taxes into one broad framework. However, the division of GST into three
categories (CGST, IGST and SGST) appears to have created some confusion in the
marketplace, according to the experts.
The new structure requires all manufacturers, traders and service providers to
comply with the tax norms at the state level. It facilitates complete fungibility of
input tax credits, though.
Macroeconomic impact of GST
GDP:
GDP growth to reduce to 5.7% in June quarter. Economists believe that
this is primarily due to GST, after effects of demonetization and INR
appreciation against USD
Inflation:
Initial fears of inflation under GST; however, certain measures like
anti-profiteering and rate parity helped keep inflation under check
70 days of GST journey – some teething issues witnessed…
Unclear position in terms of law (e.g. cross charges between distinct entities,
classification and GST rate)
Complexities around place of supply and location of supplier (multiple
registrations across India)
Transition of credits/other transition issues
Sandeep Ashok Gupta
(S.Gupta@MotilalOswal.com); +91 22 3982 5544 /
Somil Shah
(Somil.Shah@MotilalOswal.com)
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428 /
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com)
September 2017
Investors are advised to refer through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

GST Day
Issues around uploading forms (no utility with thousands of line items to be
uploaded)
GSTN network not stable
Complex return filing (returns to be filed state-wise – three returns per state)
Invoice-wise data uploading
Data to be reported in multiple sections (e.g. URD, exempt, Nil, creditable,
non-creditable, and reporting of purchases HSN wise)
Uncertainty on data capturing, tax reporting and tax payments/credits
Multiple issues around GSTN network (disconnect between law and GSTN
reporting tool)
…but the reform to be beneficial over long term, by way of:
Shift in trade from unorganized to organized sector:
The transition to
organized trade is expected to be led by: (a) an automated process to ensure
credit flow and compliance; (b) an e-way bill process to track movement of
goods and (c) availability of MIS on GSTN network. Under the new regime, the
unorganised sectors can only remain existent only if the entire chain is out of
the GST network. Non-compliance is possible in case of last mile sales where a
vendor deals with B2C customers (i.e. unregistered to unregistered sales).
Enhanced tax base and increased revenue collection:
This will be primarily led by
a change in threshold limits to be compliant with GST. Until now, registrations
have increased 25% (1.8m added to the 7.2m existing registered tax payers).
Furthermore, more tax payers are expected to register over the coming days.
Revenue collections of ~INR923b in July from 64% (3.8m tax payers) of the total
tax payer base, as against the target of INR910b. These are gross numbers (not
net of input credit).
The experts believe that the tax rates may be reduced if collections continue till
December and the level of compliance increases.
GST impact on tiles industry
We hosted Simpolo Vitrified’s Group CEO Mr Anil Beejawat and Group CFO Mr
Manish Kagaratha as part of our GST Day. Key takeaways:
Simpolo, based out of Morbi, is among the top 10 tiles manufacturers in India. It is
a regional player with a primary focus on Gujarat, Chhattisgarh and Madhya
Pradesh. Over the last 10 years, the company recorded revenue CAGR of 32% to
reach ~INR8b in 2017. It operates at EBITDA margin of ~20% and gross margin of
~60%, at par with the industry leader.
The size of the tiles industry is INR280b, of which ceramic tiles (primarily a utility
product) account for INR120b. The share of other tile types, such as vitrified and
porcelain, has been increasing at a faster rate.
In India, per capita tiles consumption is as low as 0.5 square meters per person,
compared to China (2.6 square meters per person), Europe (5-6 square meters
per person) and Brazil (3.4 square meters per person). However, rising disposable
income of the growing middle class and housing shortage of 40m units present a
great potential. Also, GST, demonetization and the affordable housing scheme are
expected to boost demand. Affordable housing scheme would create significant
demand for ceramic tiles.
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September 2017

GST Day
The Indian tiles industry in terms exports constitutes less than half a percent of
the global market. However, this is set to change as Indian exports are exhibiting
accelerated growth. The top end of the global export market is dominated by
China (36.8%) and Italy (15.1%).
GST rates on tiles have increased to 28% (from 25-28% in the previous regime),
implying a minimal impact on price. The destocking effect of GST continued till
mid-August, post which order flows have been robust.
Post GST implementation, unorganized players have increased prices. As a result,
the pricing environment has turned competitive. Unorganized players have
resorted to ‘under-billing’ to avoid taxation. However, the Morbi association is
taking steps to control such activities and working to implement a minimum
selling price regime.
The company believes that such steps would force unorganized players to
participate in organized trade. The company expects significant consolidation,
going forward.
GST impact on Retail Sector
We hosted Retailer Association of India CEO Mr Kumar Rajagopalan as part of our
GST Day. Key takeaways:
According to the RAI, GST will bring the following three key changes for retailers:
Help ensure greater availability of goods (expected to rise from 60-70% to 75-
80%), also increasing sales
Reduce time taken for goods to reach retail outlets from warehouses
Ensure reduction in wastage
Earlier, retailers did not deal directly with manufacturers due to the high and
multiple taxes. GST can now make this possible.
Supply chain will have to be modified – it will not only improve on account of GST,
but also due to technological changes.
Big retailers are changing the supply chain; they are looking at more value and
focusing on transportation instead of lower tax incidence.
Earlier, the unorganized segment was able to earn a margin of ~12% via tax
arbitrage. This, however, will not be possible now. Thus, there will be a much
more level playing field.
The onset of GST may also shift the psyche of consumers toward branded goods,
as the price gap between organized and unorganized players will reduce.
Upcoming trends in the retail segment other than GST:
Most retailers now have omni-channel presence
Hypermarkets and supermarkets are looking to try and enter small spaces via
small retail outlets (fulfillment centers like the ones that D-Mart has)
Overall scenario post GST is positive – consumer courts are also becoming more
efficient and organized.
As of now, ~3-4m retailers have registered themselves under the GST.
The RAI believes that minimum wages hike of up to INR15,000 is manageable
because of increased efficiencies and savings in other operating costs. Attrition is
mostly restricted to the industry.
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September 2017

GST Day
GST impact on the Adhesives Segment
We hosted leading Adhesives distributor as part of our GST Day. Key takeaways:
Faced no significant changes in inventory pre- and post-GST.
Any extra cost on account of GST was borne by the company itself; in fact, Fevicol
white glue saw a cost reduction of INR10/kg, as the GST rate applicable on
adhesives was lower compared to the earlier indirect tax rate.
75% of its customers already have GSTN. Cheque payment is almost 100%.
Sales are almost back to normal levels after initial GST disruption.
The RoI for Fevicol distributors is ~24%.
Over the years, the company has been able to successfully migrate customers to
premium products. If the base Fevicol version is priced at INR100, the Marine and
Hyper variants are at INR130, and Heatx at INR140. Fevicol Marine is already 70%
of sales, 3-4 years after launch.
Despite peers selling at a discount, Fevicol has not lost market share.
New professional management at Pidilite has strengthened the IT platform and
systems/processes in recent years.
GST impact for leading FMCG company distributor
We hosted large Hindustan Unilever (HUL) distributor as part of our GST Day. Key
takeaways:
Post demonetization, HUL had given distributors credit for 8-10 days. The
distributor, however, gave its retailers credit for around 15 days, enabling
goodwill.
Demonetization affected the distributor only to the extent of 5-10%.
GST did not affect the business of the distributor as such; only the accounts and
finance departments have been kept busy. GST registration is nevertheless slow
among its customers. Cash payment is still around half of its sales.
Despite demonetization and GST, sales are growing in double-digits.
The distributor believes that wholesalers want to increase their current margin of
2% to 3-3.5% to compensate for GST costs.
Management of HUL, as per the distributor, believes that the proportion of sales
through wholesalers will come down due to GST, and thus, is targeting small
kiosks shops as an alternative. HUL is also encouraging its distributors to
aggressively increase the number of outlets serviced to pick up the slack from the
absence of sales from the wholesale channel.
The distributor is particularly excited about the medium-term prospects of the
‘Lever Ayush’ range of products, which have been recently launched in
Maharashtra after the initial success in the four southern Indian states.
Technology has been strengthened further, with detailed suggestions provided to
sales personnel on their handheld devices based on the six-month ordering
pattern of each outlet. The Motto is ‘Don’t Sell, help them buy’.
September 2017
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GST Day
NOTES
September 2017
5

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GST Day
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September 2017
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