India can absorb inflationary pressures from GST rollout:Bankers

Uday Kotak, Executive VC & MD, Kotak Mahindra Bank, says passing of the GST Bill is a symbol of ‘One India’. While Arundhati Bhattacharya, Chairman, State Bank of India said GST was a very important piece of legislation that will improve efficiencies within the system.

India on Wednesday paved the way for the biggest and most important tax reform as the Rajya Sabha approved the Goods and Services Tax (GST) Bill.

Uday Kotak, Executive VC & MD, Kotak Mahindra Bank   , said passing of the Bill is a symbol of ‘One India’. While Arundhati Bhattacharya, Chairman, State Bank of India   said GST was a very important piece of legislation that will improve efficiencies within the system.

Agreeing with Bhattacharya’s views, Kotak says GST will bring in consolidation in the tax system and remove inefficiencies from the system. Both of them feel this will be a big boost to the manufacturing sector and passage of goods through different states will become easier and simpler.

Both also agree on the fact that even though the passage of such a landmark tax reform could add to inflationary pressures, India currently is in a situation where it would be able to absorb a bit of upward pressure on inflation.

Bhattacharya also believes that GST would not impact banks badly and that although initially there could be some teething problems, the bank and the country is ready for it.

Kotak says the long-term benefits of GST would far outweigh the short-term impact on inflation. He expects the implementation of GST by the first half of FY18.

Both are of the view that administrative mechanism should be made easy for GST.

They also spoke on the short-term hurdles banks could face on different issues but were confident that the government would look into those and solve them.

Below is the verbatim transcript of Uday Kotak and Arundhati Bhattacharya’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Latha: What are your first thoughts?

Bhattacharya: It is a very important piece of legislation that has just been passed. We have been speaking about this for a long time saying that these multiple taxes and the cascading effect it has becomes a very big problem for the efficiencies within the system for the ultimate prices that these products cost.

We have also been talking about the fact that if you are exporting goods somewhere in the north of the country, it can take 19-20 days for those goods to reach the ports on account of the multiple checks that happen at every state border — if you compare that to the fact that you can probably import the same goods within four days from some place in Iran or some such place. So it used to be a very big obstacle for our people and therefore the passing of the GST is something that will definitely improve the efficiencies of our manufacturing sector.

Overall it is a very important piece of legislation. We expect it to impact the gross domestic product (GDP) positively. Initially, there will be a lot of trouble but then that is so with every single big change. So we are sort of prepared for it.

Latha: What are your first thoughts?

Kotak: I look at the passing of the GST as a very powerful symbol of one India, a single India at a time when the continents like Europe and others are going through the challenges of borders and keeping one Europe, it is a great situation that India is moving to a single indirect tax rate across everything. I completely agree with what Arundhati Bhattacharya said that from a long-term point of view, this is a big advantage though there will be short-term troubles.

Anuj: Let us talk about the short-term problems. The biggest concern is the inflationary pressure that would happen because that is the anecdotal evidence in all the countries where GST has been passed. Do you think that is a headwind that the economy can absorb?

Kotak: We have to look through this short-term and inflationary pressure because ultimately you have a significant long-term benefit to fisc and consolidation of the tax system, removal of a lot of inefficiencies across the system.

Sonia: What kind of GDP growth do you foresee over the next two years, considering that we not only have the passage of GST but we have other things working in our favour like a positive monsoon, the 7th Pay Commission, the One Rank One Pension (OROP), how do you see growth progress?

Kotak: My sense on inflation is — if any and I am not even sure about what has happened in the rest of the world — it also depends on a level of tax. It is an advantage certainly for manufacturing, there could be some increase of tax services, which may happen in the short run but looking through both, I feel that this is something which will be extremely positive — very difficult at this stage to define it in exact percentage of GDP.

Latha: We have been playing all of yesterday and today the sectors that are advantaged and the sectors that are disadvantaged. Now obviously services at the moment are being taxed at the 14 -14.50 percent along with the cess but now they will move to that rate whether it is 18 percent or 20 percent. How do you see that impacting banks? Bhattacharya: I don’t think, it will impact banks very badly because even if it goes up as long as compliance is good and as long as the tax base is wide enough, there will be some little hiccups in the initial stages but I think this is something that can be absorbed. However, the fact of the matter is that the problems are more in the implementation side.

At this point of time, I am told that we will have to register every single office in every single state as individual entities. Now that is a very big problem because we have many small branches and therefore relying on these branches to do the right thing and do all of this compliance is a very big cost.

So, we had in fact in the bank had centralised service tax at one point in order to ensure that it is properly administered. These are issues that International Development Association (IDA) has already taken up at the government and pointed out that we should not have more of a challenge on implementation from our side. These are as I said issues that need to be worked out still. We are hopeful that they will be worked out.

Regarding the increase I can tell u this is the best time that we are positioned for absorbing a little bit of inflationary pressure. If you look at the core consumer price index (CPI), the way it has moved in the past so many quarters it has held steady. It has only been the vegetable prices that have put the upward pressure. Today if you are looking at the vegetables even that pressure has come down considerably. In the last 15-20 days vegetable prices have tended down. As you can see the monsoon is doing excellently well we expect the vegetable prices to keep trending down.

Therefore to that extent, we have quite a stable inflation scenario. In this scenario some little bit of upward pressure can definitely be absorbed. We therefore feel that this is definitely one of the best times at which the GST can be implemented.

Latha: This administrative confusion, yesterday we were having this argument with our tax panel what if Kotak were to buy a Finacle product for its 1,000 branches in 30 states. Is it a nightmare in terms of GST registration numbers that you will have to keep?

Kotak: It is absolutely correct that we need to make sure that as we move to one India one tax on GST, the administrative mechanism makes it easy for implementation. There are issues as one understands in doing this. Therefore, my recommendation would be that as we go through this execution phase, we should simplify the way in which this happens. One has to be careful that if there is no dramatic increase in the work, which banks have to do it in order to ensure accuracy and correctness.

What I also would like to mention here is that as the challenge is of implementation of this act happens, there is also a time constraint. I would certainly hope that we don’t take too much time in executing the whole process because if we do that then we come very close to the next elections. I would much rather see it happen faster sometime in first half of fiscal FY17-FY18 because as we go later and the noise increases, there will be political challenges to doing it a year before the election.

Sonia: The next big issue is the GST rate. There is still no consensus on that front, but after what we saw at the parliament speech yesterday P. Chidambaram has sort of drawn a line in sand stating that it should not exceed 18 percent. As one of the veterans of the India Inc, how would you react to that 18 percent rate?

Kotak: Obviously it is a balance between matching the books and keeping it low. It is no point at this stage saying whether it is going to be 18-17 percent, 19-20 percent but obviously from the point of view of perception the rate which is in the teens is better than a rate which is with the first digit 2.

Sonia: I wanted to ask you a little bit about how you are reading into the global volatility that we have seen and whether India would be insulated from the global volatility given the kind of domestic reforms that we have know with GST etc?

Kotak: First of all, as I say that right now with goods and services tax passed one is clearly seeing that combined with good monsoons significantly improving India’s domestic situation. I feel very positive about the current domestic economy situation especially with oil coming lower. Having said that, we have also to be clear that India is connected to the world, exports are under pressure because of the global slowdown, which has its own impact on demand and GDP but overall at the time of such fragility in the world, a very strong domestic macro economic situation combined by significantly better local factors are a big plus for India. Therefore, India has a better ability to weather global volatility but India is certainly participating more in the world than what we have earlier assumed.



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