India WatchISSUE 31 | JANUARY 2016

In association with

Welcome to the Winter 2015/16 edition of Grant Thornton’s India Watch, in association with the London Stock Exchange.

The long-awaited Goods and Services Tax (GST) may finally be rolled out this year, subject to it making its way through the upper house of Parliament. The rationale behind GST is that it simplifies the indirect tax regime with a single tax. The impact will be felt differently in the range of sectors, but overall, by removing cascading taxes, the Indian market will become more competitive and the tax compliance burden for foreign investors will be reduced.

Our economic update highlights some of the external and internal challenges faced as well as the various initiatives including FDI related reforms and the planned initiatives such as ‘Start-Up India’.

If you would like to discuss any of the matters arising in this issue or how Grant Thornton’s South Asia group can help you, please contact us.

The Grant Thornton India Watch Small Cap Index fell by 29.4% during 2015, compared to a rise in the AIM indices. This decline was mainly caused by the falls in the share price of Kolar Gold Ltd and Oilex Ltd among other poorly performing stocks. However the Index remained relatively flat in the fourth quarter with a fall of just 1.4%, reflecting cautious investor optimism as India benefits from falling oil and commodity prices.

Indian deal activity established a number of recent highs in 2015, with strong inbound M&A and private equity activity. Government initiatives to ease FDI norms across 15 sectors helped boost inbound transactions in the second half of 2015. Meanwhile, poor corporate performance over the financial year and uncertainties in the global economy hindered outbound transaction activity. The energy & natural resources, IT and pharma sectors continued to dominate M&A activity. The record levels of more than 1,000 private equity and venture capital deals were dominated by 600 investments in start-ups.

Anuj Chande Partner, Corporate Finance and Head of South Asia GroupGrant Thornton UK LLPT +44 (0)20 7728 2133 E anuj.j.chande@uk.gt.com

Prashant MehraPartnerGrant Thornton India LLPT +91 124 4628 071E prashant.mehra@in.gt.com

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India Watch – Issue 31

Grant Thornton India Watch Small Cap Index falls as AIM indices rise

The Grant Thornton India Watch Small Cap Index fell by 29.4% during 2015 compared to a rise in the FTSE AIM 100 and FTSE AIM-ALL SHARE of 14.4% and 5.3% respectively. The Index remained relatively flat in the fourth quarter, however, with a fall of just 1.4%, reflecting marginal improvement in investor sentiment as India continues to benefit from falling oil and commodity prices.

The decline in the Grant Thornton India Watch Small Cap Index over the year, compared to a rise in the AIM indices, was mainly due to continuing falls in the share price of Kolar Gold Ltd and Oilex Ltd among other poorly performing stocks. There was, however, good news for two of Q3’s poor performers, Greenko Plc and Jubilant Energy NV which were both top risers this quarter. AIM investor sentiment towards India remains muted, but there is room for optimism in the medium term once economic reforms start to have an impact on the ground.

Winners and losersSKIL Ports & Logistics Ltd, which is developing a major new green field port and logistics facility in Navi Mumbai, was the quarter’s biggest riser with share price gains of 41.6%. During the quarter, the company announced that the site was progressing well and that key stages had been completed. Shareholders appear to be pleased with the good news coming out of SKIL and its share price ended the year up 42.5%, in contrast to the falls in its share price for the previous four years in a row.

Greenko Plc has performed well in Q4 after completing the sale of the company’s shares in Greenko Mauritius and has secured a place as the second highest riser on the Grant Thornton Index. While seeing an overall share price decline of 31.9% over the year, Greenko had a strong Q3, which continued into Q4, and it appears to have turned a corner, with a 35.2% rise in its share price during the quarter. The consideration for the sale of Greenko Mauritius was announced

The Grant Thornton India Watch Small Cap Index fell by nearly 30% during 2015 compared to the rise in FTSE AIM 100 and FTSE AIM All Share.

60

70

80

90

100

110

120

130

Jan 15 Mar 15 Apr 15Feb 15 Mar 15 Jun 15 Jul 15

GT IndiaWatch - All

GT IndiaWatch - Smaller caps

FTSE 100

FTSE All Cap Asean

FTSE AIM All Share

FTSE AIM 100

FTSE AIM 50

Aug 15 Sep 15 Oct 15 Nov 15 Dec 15

Source: Thomson Reuters

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January 2016

at £162.8 million and the company intends to make an initial cash return to shareholders of 98 pence per share.

Jubilant Energy NV, a Dutch-based oil and gas exploration company, was one of the top performers in Q4 despite being the worst performing stock in Q3 2015. Its share price rose 26.3% although this still left it down 94.4% over the year and the India- and Myanmar-focused firm decided to delist on 17 November 2015.

Kolar Gold Ltd, the Indian-focused gold exploration and mine development company, was the quarter’s biggest loser with a share price fall of 60.3%. The company announced that it was considering the sale of assets or the whole company in order to maximise value for its shareholders and preserve cash. The company announced a pre-tax loss of £1.3 million and this bad news was compounded by the company’s CEO Nick Spencer resigning with immediate effect.

India-focused oil and gas company, Oilex Ltd is the second biggest loser of the quarter. Q4 saw the company release a number of negative announcements, with trading also being halted twice, resulting in a share price fall of 58.9%. It ended the year 75.8% down. Oilex saw its broker Westhouse Securities resign but the company immediately appointed Strand Hanson as its replacement. Legal proceedings have commenced against Oilex by Zeta Resources Limited and Oilex has filed a cross-claim against Zeta for its failure to complete a share subscription. Additionally, Oilex’s joint venture partner in India, GSPC, has notified Oilex that it wishes to alter the approved 2015/16 work programme, which has caused uncertainty around the outlook for development of the company’s core assets in India.

The third biggest loser of the quarter is Koovs Plc, the fashion business focused on the young Indian e-commerce market, which saw its share price fall by 43%. This was mainly due to cash shortfall fears after the company announced in its annual results that it would use up all its cash reserves before the second quarter of its next financial year without further funding, resulting in a fall in company’s shares of 36% to 43p. Koovs also saw its pre-tax losses increase despite doubling its revenue. The company’s share price fall in the quarter only added to its woes and it now sits at 24.5p, down 84.2% for the year.

Country outlookIndia’s government has revised its forecast for economic growth in the fiscal year downwards to a growth rate of 7-7.5% from earlier expectations of 8.1-8.5%. Despite the revised forecasts, India will still be the world’s fastest growing major economy as China is struggling to maintain growth of 7%. The Indian government has cited weak corporate spending, tepid global demand and two successive droughts that have hit farm output as the main reasons for growth in Asia’s third largest economy being curtailed. Despite India benefiting from lower oil and commodity prices, a lack of global demand has hindered its exports. Growth is set to continue, but there are clearly some internal and external challenges the country needs to contend with.

Anuj ChandePartner, Corporate Finance and Head of South Asia GroupGrant Thornton UK LLPT +44 (0)20 7728 2133 E anuj.j.chande@uk.gt.com

*The India Watch Index consists of 24 Indian companies listed on AIM or the Main Market (excluding GDRs). We only consider companies to be Indian if they are domiciled in India and/or foreign companies holding Indian assets or Investment companies with Indian promoters. The index has been created via Thomson Reuters and is weighted by Market Value. To avoid distortion of index trends, the largest market cap entity, Vedanta Resource, is excluded.

**Data sourced from Thomson Reuters.

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India Watch – Issue 31

Indian inbound M&A and private equity investments dominated 2015 deal activity

New milestones were achieved for deals involving Indian companies during 2015, with record levels of private equity activity primarily focused around start-ups and domestic deals. Together with M&A activity, overall deal volume surpassed the decade-long high achieved in 2014.

Deal summary Volume Value (US$ million)

Year-to-date 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Domestic 216 233 219 252 314 5,627 6,088 5,646 16,192 8,876

Crossborder 286 263 223 280 256 40,845 14,537 17,995 16,871 19,514

Mergers and internal restructuring 140 100 58 37 11 - 14,789 4,541 3,989 2,030

Total M&A 642 596 500 569 581 46,472 35,414 28,182 37,052 30,420

Private equity 378 402 453 608 1049 9,040 7,385 10,025 12,373 16,133

Grand total 1,020 998 953 1,177 1,630 55,512 42,798 38,207 49,424 46,554

Crossborder includes

Inbound 143 141 140 164 131 29,055 5,985 8,741 10,895 13,538

Outbound 143 122 83 116 125 11,789 8,552 9,254 5,976 5,986

Overall deal activity in 2015 was US$46.5 billion spread across 1,630 deals, marginally lower than the US$49 billion clocked in 2014. However, overall deal volume was considerably more than the 1,177 deals in the previous year.

The year also saw less concentration in big ticket transactions with only five deals above the billion dollar mark, compared to

nine such deals in 2014. There were, however, nine deals above US$500 million and around 40 deals above US$100 million. As expected, key drivers of overall deal momentum in 2015 continued to be the deluge of inbound activity and private equity investments.

Inbound deals drove M&A deal valuesAlthough overall M&A deal volumes remained stagnant and values declined by 18%, closing the year at US$30.4 billion, total domestic and cross-border deals showed volume growth. Concentration of deal activity at the high end continued, with the top 30 M&A transactions contributing around 60% of the total value.

With 314 deals, 2015 saw the highest number of domestic transactions since 2007. However, overall value declined sharply by 45% - driven mainly by the absence of any billion dollar deals. In 2014 there were three domestic deals surpassing the billion dollar mark (Sun Pharma-Ranbaxy, Kotak-ING and JSW-Jaypee).

By contrast, the value of cross-border deals rose 16% year-on-year to more than US$19.5 billion, with 11 deals valued at more than US$500 million each (eight inbound and three outbound). This was despite the drop in inbound investment volumes from 164 deals in 2014 to 131 deals in 2015 (20% decline year-on-year), even though the overall value of such deals increased 24% to nearly US$14 billion.

The BJP Government’s initiatives in the second half of 2015 to boost foreign direct investment (FDI) by easing investment norms across 15 sectors including defence, banking and financial services, construction, single brand retail, broadcasting and civil aviation, resulted in inbound transactions picking up pace towards the end of the year.

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Top M&A deals in 2015

Acquirer Target Sector US$ million Deal type % Stake

Vedanta Ltd Cairn India Ltd Energy & natural

resources

2,300.00 Merger N/A.

ONGC Videsh Ltd CSJC Vankorneft - Vankor Energy & natural

resources

1,268.00 Minority

stake

15%

Centerbridge Partners LP Suzlon Energy Ltd - Senvion SE

(German subsidiary)

Manufacturing 1,200.00 Acquisition 100%

American Tower Corporation (ATC) Viom Networks Telecom 1,192.97 Majority

stake

51%

Enterprise Products Partners Ltd Eagle Ford Shale (EFS) Energy & natural

resources

1,070.00 Acquisition 50%

Lupin Ltd Gavis Pharmaceuticals LLC. and its

affiliate Novel Laboratories Inc.

Pharma, healthcare

& biotech

880.00 Acquisition 100%

Aditya Birla Group Aditya Birla Fashion and Retail Ltd Retail & consumer 853.23 Merger 100%

Harman International Industries Symphony Teleca Corporation -

Symphony Technology Group

IT & ITES 780.00 Acquisition 100%

Mylan Inc - Mylan Laboratories

Limited

Famy Care Ltd Pharma, healthcare

& biotech

750.00 Acquisition 100%

Alibaba Group and Ant Financial One97 Communications Ltd IT & ITES 680.00 Increasing

stake to 40%

20%

Global uncertainties affected 2015 outbound deal activity There was not a great deal of outbound transaction activity at the start of the year, but momentum picked up during the second half. Indian acquisitions overseas stood at around US$6 billion from 125 deals - a marginal 8% year-on-year

increase in transaction volumes. Poor corporate performances in the 2015 financial year and emerging global uncertainties restrained outbound transaction activity during 2015. However, given India’s predicted growth trajectory, especially in the context of overall global signs of weakness, outbound deal activity is likely to pick-up in 2016.

M&A sector focus Despite changing positions, energy & natural resources, IT & ITES and pharma, healthcare & biotech remained the top three sectors for M&A during 2015 – as was the case during 2014.

The energy & natural resources sector has consistently seen large M&A transactions since 2013, with aggregate investments in this sector totalling US$17.6 billion. Transaction values peaked in 2015 with US$5.6 billion spread across over 265 deals. Notable

deals in the sector were Vedanta-Cairn, ONGC-Vankor and the sale of Eagle Ford Shale (USA) by Reliance Industries.

IT & ITES (US$5.4 billion) and pharma, healthcare & biotech (US$4 billion) also witnessed relatively high cumulative transaction values in 2015. The telecom sector has the highest average deal size of US$325 million in 2015 on account of four large transactions (ATC-Viom, Reliance-Sistema, Idea-Videocon and Vodafone’s sale of its minority stake in Bharti-Airtel).

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India Watch – Issue 31

Unprecedented activity in private equity investments2015 saw record levels of private equity (PE) and venture capital (VC) activity, with over 1,000 deals contributing more than 60% to overall deal volume and 35% (US$16.1 billion) to overall deal values during the year. The substantial increase in volume (over 70% year-on-year) was due to a phenomenal level of interest among PE/VC investors in India’s start-ups. A substantial proportion of the total volume (over 600 investments) involved start-up investments. However, overall investment was fairly concentrated, with the top 3% of deals making up around 50% of the total value.

The year also saw more mature start-ups such as Flipkart, Snapdeal, Ola Cabs and Paytm raising funds in excess of US$500 million, based on very strong valuations. The buoyant sentiment towards start-ups manifested itself in angel investors,

angel networks, venture capitalists and some of the more established PE funds, all making bets on the Indian start-up growth story.

It was a watershed year for start-ups in India. Despite the sheer quantum of funds raised, slight pessimism started setting in in the second half of 2015 with some start-ups shutting-up shop or laying-off employees. Going forward, the start-up ecosystem in India is likely to witness more rationalisation, funding may get tougher and the focus will increasingly be on fundamentals, with justification around valuations and scalability being key. There is a risk that we will see fewer unicorns in the making in the short-term. Investors’ ability to mentor and nurture a start-up idea rather than just provide financial investment will be key to finding the right early-stage opportunities.

Top Private Equity deals in 2015

Investor Investee Sector % stake

Investment value in US$

million

Baillie Gifford, Greenoaks Capital, Steadview Capital, T Rowe Price Associates, Qatar Investment Authority, DST Global, GIC, Iconiq Capital and Tiger Global

Flipkart Online Services Pvt Ltd

IT & ITES N.A. 700.00

Carlyle Group Magna Energy Ltd Energy & natural resources N.A. 500.00

TA Associates and India Value Fund Advisors Atria Convergence Technologies

Telecom 95.00% 500.00

Foxconn, Alibaba and SoftBank Jasper Infotech Pvt Ltd - Snapdeal.com

IT & ITES N.A. 500.00

Baillie Gifford, Falcon Edge Capital, Tiger Global, SoftBank Group and DST Global

Olacabs.com - ANI Technologies Pvt Ltd

IT & ITES N.A. 500.00

DST Global, Accel Partners, Tiger Global and Steadview Capital

Olacabs.com - ANI Technologies Pvt Ltd

IT & ITES N.A. 400.00

Apax Partners LLP Shriram City Union Finance Ltd

Banking & financial services 20% 370.97

Advent and Temasek Crompton Greaves Ltd-consumer products division

Manufacturing 34% 316.00

Warburg Pincus Piramal Realty Real estate N.A. 283.60

Goldman Sachs, The Global Environment Fund, Abu Dhabi Investment Authority

ReNew Power Ventures Pvt Ltd

Energy & natural resources N.A. 265.00

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Investments in the IT & ITES sector drove overall PE investment, with 38% growth year-on-year, resulting in the highest levels recorded to date. The IT & ITES sector alone contributed 45% of total investments with US$7 billion. The top 15 deals (above $100 million each) contributed around 50% of total IT & ITES transactions in 2015. The banking, financial services & insurance sector also witnessed deal growth of over 56% year-on-year in 2015. Investments of more than US$100 million each in seven banking, financial services & insurance (BFSI) players during 2015 made up more than 60% of the total investments in the sector.

A significant proportion of PE divestments during the year (59%) were full exits. Popular exit routes for PE/VCs were open market transactions (51% of total number of exits) and secondary stake sales (43% of total exits). An analysis of private equity divestments shows that key sectors that saw full exits during 2015 were real estate (17 exits), followed by IT & ITES (12 exits) and BFSI (10 exits).

Final wordsOverall, 2015 was a year of mixed sentiments. While private equity investments saw significant growth driven by traction in the start-up space and cross-border deal activity grew in value terms, overall M&A deal value declined. Likewise, domestic transactions clocked the highest number of deals since 2007 with 314 deals, but overall deal values declined. Poor corporate performances in the 2015 financial year due to a host of issues and emerging global uncertainties restrained big-ticket domestic and outbound deals. However, the government’s initiatives to push policy reforms, favourable commodity prices and curtailed government spending are likely to put India on track to achieve sustained foreign and domestic investment growth.

Atul MongaDirector Grant Thornton UK LLPT +44 (0)20 7865 2534E atul.monga@uk.gt.com

Top private equity sectors in YTD 2015 – by value

IT & ITES [45%]

Banking, Financial Services and Insurance [13%]

Real Estate [8%]

Energy & Natural Resources [7%]

Pharma, Healthcare & Biotech [7%]

Manufacturing [5%]

Retail & Consumer [3%]

Telecom [3%]

Others [9%]

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India Watch – Issue 31

Pending reforms indicate economic stability in India

Reforms proposed by the Indian Government may not see the light of day any time soon on account of the main opposition party and bureaucratic hurdles. But action on reforms indicates greater stability in the long term.

There is some appeal in the Indian economy. Japan has recently pledged to build India’s first bullet train and provide a US$12 billion loan for the project. Japan is not the only country looking to invest in India’s growth story, with a number of foreign investors, institutions and countries showing interest at the moment. Sectors such as infrastructure, education, pharmaceuticals, real estate, science and technology and manufacturing, show particular promise for growth.

Announcing the bullet train package, the Japanese Prime Minister, Shinzo Abe, said “India’s economic policies are like Shinkansen – high speed, safe and reliable while carrying many people along.”

Japan’s Shinkansen high-speed rail network is considered to be a lifeline for the country. The bullet train has not only contributed to the country’s economy but also resulted in socio-economic development across a number of regions. In addition to a number of regulatory and economic reforms, India is replicating the same Shinkansen model of development through its rapid transit corridors, the Delhi-Mumbai Industrial Corridor and the state metro rail networks around the country.

Huge influx of FDIThere has been a surge in total foreign direct investment (FDI) into India in recent times. During the 2014/15 financial year, FDI grew 27% year-on-year to around US$31 billion compared with US$24 billion in 2013/14.1 The first half of 2015 witnessed US$31 billion of FDI, surpassing the FDI figures for China and the USA.

The services sector, which contributes around 60% of India’s GDP, grew by about 20% to around US$1.5 billion in the first six months of the current financial year.2

Government has recently announced FDI-related reforms and liberalisation touching upon 15 major sectors of the economy.3

A sense of economic stability, an improving business environment, the above-mentioned FDI measures and robust economic diplomacy with the UK, Singapore and now with Japan, are some of the reasons why overseas investors are looking to India.

Several global institutions have projected India as the leading destination for FDI in the world. The International Monetary Fund (IMF) has branded India as the brightest spot in the global economy and the World Bank has projected India’s growth at more than 7.5% this fiscal year.

The latest round of economic data corroborates this trend. Figures released in November 2015 showed that India’s economic growth accelerated to 7.4% in the second quarter of the financial year and outperformed China’s growth. Riding on the back of robust growth in consumer products and capital goods during the festive season, October industrial production grew 9.8% on an annual basis. The manufacturing sector, a key indicator of economic activity, grew 10.6% year-on-year in October.4

But there are a few impediments to this growth, which could affect the economy.

Setback on reforms As international diplomacy has been maturing and firming up, the Government continues to face headwinds over a number of domestic reforms. The fate of the Goods and Service Tax (GST) is uncertain due to continued protests by the Opposition in the Rajya Sabha, the Upper House of the Legislative Assembly. The planned implementation of GST on 1 April 2016, while still a possibility, is likely to prove difficult. There are concerns that the opposition to GST and the uncertainty over its implementation could trigger negative sentiment among global investors.

Inflationary pressureAnother issue for the Government is inflation control. Driven by higher food prices, India’s retail inflation accelerated to a 14-month high in November. While retail prices were up by 5.4% year-on-year in October, the retail food price jumped to 6.1% year-on-year, faster than October’s 5.25% rise.5

The Reserve Bank of India (RBI) aims to keep retail inflation to around 6% for January 2016. But steep Government pay hikes, irregular rainfall and weak rural demand pose risks to

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that target. After aggressively easing monetary policy this fiscal year, in December, the RBI kept its policy repo rate unchanged at 6.75%.

Shrinking global exportsExports declined more than 24% to US$20 billion in November, compared with US$26.4 billion a year earlier. The 12th straight decline over the past year is on account of subdued global demand. Merchandise exports, which form almost two-thirds of India’s total exports, have been declining in the last 11 months. Merchandise exports in the first eight months of this fiscal year declined by 18.5% and stood at US$174.3 billion, compared with US$213.7 billion in the corresponding period last year.6

A sharp decline in imports, however, has helped check the trade deficit. Led by low crude oil prices and subdued imports of gold, coal and fertilisers, imports declined over 30.3% to US$29.7 billion from US$42.7 billion a year ago. This helped reduce the trade deficit to US$9.7 billion from US$16.2 billion.7

In addition to the decline in exports, other global challenges could prove to be a hurdle for growth in India. China’s slowdown and economic restructuring is likely to have an impact on the global

References 1. Department of Industrial Policy and Promotion (DIPP)2. Economic Times, 13-December 20153. Ministry of Commerce and Industry press release, PIB, 10 November 2015 4. Trading economics India5. Trading economics India and RBI Press release 1 December 2015 Fifth Bi-monthly Monetary Policy Statement, 2015-166&7. Trading economics India8. CNBC Economy report, 15 December 2015

Prashant MehraPartnerGrant Thornton India LLPT +91 124 4628 071E prashant.mehra@in.gt.com

economy. According to the rating agency Fitch, the slowdown in China’s growth might hinder global trade and have an impact on emerging markets and global corporates.8

The US Central Bank’s recent interest rate increase could affect emerging economies such as India, pulling back massive foreign fund flows.

Although there have been a few setbacks, however, there have also been some gains. The Union Cabinet has recently cleared the long pending Real Estate (Regulation and Development) Bill 2015, which aims to set up a real estate regulator for the country. This would safeguard the interests of millions of property buyers by ensuring timely completion of projects. With mandatory registration of real estate projects and the setting up of Appellate Tribunals both centrally and at state level for dispute resolution, the Bill will bring greater accountability and transparency to the industry. This will be a step in the right direction to normalise the market.

We expect industrial growth to improve further as the Government has already started working on easing approvals for setting up new businesses in the country. To keep the growth momentum rolling and to attract foreign

investments, there is a need to improve the skillsets of professionals and quickly develop infrastructure.

Additionally, a number of other initiatives such as ‘Make in India’, ‘Skill India’, and the soon to be added ‘Start-up India’ initiative will provide a much-needed investment boost to the country. In addition to these, the Government’s focus on the development of infrastructure and 100 smart cities will add to the overall investment value of the country. In conclusion, while there are some challenging external and internal issues, there is no doubt that the train is moving in the right direction.

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India Watch – Issue 31

India’s long-awaited Goods and Service Tax (GST) will be the largest indirect tax reform in the country since independence. It is set to change the entire indirect tax landscape by simplifying the structure, compliance and digitisation of taxation.

GST is a pan-India level single unified tax on both goods and services, levied only on ‘value added’ to goods and services at each stage in the economic supply chain. GST would replace various existing indirect tax levies at the central and state level into a dual GST comprising Central GST (CGST) and State GST (SGST).

The story so farGST was first announced by the then finance minister in the 2006/07 Budget with a plan to introduce it from 1 April 2010. However, achieving political consensus was a major stumbling block and the tax has been in incubation ever since. The government pushed the Constitution Amendment Bill to enable implementation of GST through the Lok Sabha (the lower house of Parliament) in May 2015, but it then hit the expected roadblock of the Rajya Sabha (the upper house of Parliament) during the Monsoon session and Winter session of Parliament in 2015.

The GST legislation remains pending in the Rajya Sabha where the ruling party does not have a majority and GST continues to face stiff opposition from the main opponent party. Little progress was made during the Monsoon and Winter sessions due to political interference by the opposition.

The fate of GST in India is yet to be decided, but the GST Bill is expected to be tabled again in the February 2016 Budget. Although the government is expected to miss the planned 1 April 2016 implementation deadline for GST, it is hopeful of bringing it in at some point over the 2016-17 financial year.

A three-tier rate structureA panel, headed by chief economic adviser Arvind

Subramanian and formed by the Government to decide on GST rates, has recommended a revenue-neutral rate of 15-15.5%, with a standard rate of 17-18% which will be levied on most goods and all services.

How will India’s GST affect overseas investors?

India’s Goods and Service Tax (GST) is intended to be rolled out this year. We look at how this major taxation reform is expected to affect different sectors and overseas investors.

The panel has recommended a three-tier rate structure: some essential goods will be taxed at a lower rate of 12%; so-called ‘demerit’ goods such as luxury cars, carbonated beverages, pan masala and tobacco products at a higher rate of 40%; and all other goods will be taxed at a standard rate of 17-18%. It is proposed that all services will be taxed at the standard rate of 17-18%.

Meanwhile, the government has put four reports on key business processes around the GST regime into the public domain: registration, payment, refunds and returns. Although draft GST law was recently released to the public, the government has yet to declare this so-called Model GST Act as official.

Impact of GST on different sectorsThe GST regime will be a modern tax reform that is expected to usher in growth and opportunities for businesses in India and to bring enormous benefits to most sectors.

In manufacturing, GST would have a far reaching impact, compelling businesses to realign bottlenecks such as production costs, production time, supply chain, compliance and logistics through the new indirect tax structure. The regime will trigger a transformational shift from a complex multi-layered indirect taxation system to a unified taxation system. GST will initiate positive change by reducing cascading taxes, and lead to manufacturing synergy in India.

The fast-moving consumer goods (FMCG) industry is likely to benefit in terms of efficiency due to a more seamless flow of credit. The industry is expecting a major reduction in taxes once GST is implemented, provided the recommended rates are applied.

The IT industry is one of the biggest revenue-generating sectors for government and job-creating sectors for individuals. Under the proposed GST regime, it anticipates a favorable shift in tax rates.

Conversely, the services sector is expecting to see a rise in prices as the tax rate is expected to increase from its current 14.5% to 18% or more. Services such as telecoms, hospitality and banking may see increased costs for the final customer under the proposed changes.

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Mechanism for imports and exportsUnder the proposed GST regime, IGST (Integrated Goods & Service Tax) would be levied on the import of goods and services into India. However, the export of goods and services from India would be zero-rated meaning that there would be no tax on output transactions and that the refund of input credit would be permitted.

For import and export transactions, proposed place of supply rules would determine whether GST would apply.

Possible impact on overseas investorsMany overseas-based consumer firms operating in India have been successful at adapting to the country’s unique market challenges. These range from distinct consumer tastes and preferences to the logistical challenges of reaching a very large population. GST should materially improve the business environment, particularly for foreign consumer goods companies and single-brand retailers with a presence in India.

GST will bring many advantages, but, for foreign investors, there is one that stands out: a simplified and unified tax structure that will increase transparency and decrease unwanted harassment from the tax authorities. GST will reduce the discretion of government agents to exempt companies from tax or to deviate from rate structures, which is possible for certain taxes under the current regime. GST will rely heavily on technology to ensure compliance, thereby reducing direct contact between companies and government officers and help to mitigate the risk of corruption. This is particularly important for overseas investors who must abide by stringent anti-bribery regimes in their home or operating countries.

The rationale behind GST is that it simplifies the indirect tax regime with a single tax. The removal of cascading taxes will make the Indian market more competitive and cut down on the tax compliance burden for foreign investors.

About Grant Thornton UK LLPGrant Thornton UK LLP established a dedicated South Asia Group in 1991 to serve Asian owned businesses in the UK as well as those investing into and from the Indian subcontinent. We are proud to be one of the first UK accountancy firms to focus on this region. We are widely recognised as one of the leading international firms advising on India-related matters and have been in involved in every IPO involving an Indian company on AIM, with the exception of the real estate sector.

For those clients requiring advice in both the UK and India we offer a seamless service building on the already strong and close relationship between Grant Thornton UK LLP and Grant Thornton India.

About Grant Thornton India LLPGrant Thornton in India is one of the largest assurance, tax, and advisory firms in India. With over 2,000 professional staff across 13 offices, the firm provides robust compliance services and growth navigation solutions on complex business and financial matters through focused practice groups. The firm has extensive experience across a range of industries, market segments, and geographical corridors. It is on a fast-track to becoming the best growth adviser to dynamic Indian businesses with global ambitions. With shorter decision-making chains, more senior personnel involvement, and empowered client service teams, the firm is able to operate in a coordinated way and respond with agility.

International and emerging markets blogAs part of our commitment to remaining at the forefront of changes and developments in regards to UK-India relationship we will be using this space to post original thought leadership and research relevant to the industry. The idea is to encourage discussion around these issues and to open up new areas and debate.

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More information about our South Asia Group can be found at:www.grantthornton.co.uk/en/services/advisory/specialist-international-services/south-asia-group/Krishan Arora

DirectorGrant Thornton India LLPT +91 120 710 9001E krishan.arora@in.gt.com

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