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  • Equitymaster.com : “One VAT rate would be a key inflection point for the economy”
  • OUTLOOK ARENA  >>   FACE TO FACE >>  MARCH 1, 2005

    “One VAT rate would be a key inflection point for the economy”

    Adi Godrej – the name needs no introduction. As the man in charge of the Godrej Group, he is quite well known. Under him, Godrej Consumer Products has seen a marked improvement both in performance and market cap in the last couple of years.

    We met Mr. Adi Godrej to get his views on Budget 2005-06. In his usual forthright manner, he gave us the budget's pluses and minuses, holding no punches but giving credit where it was due.

    EQTM: What are your impressions of the budget 2005-06?

    Mr. Godrej: I think generally it’s a good budget on several fronts. One is that the emphasis on rural and infrastructure development will be very good. The other is the emphasis on outcome of the expenditure, wanting to look at what is derived from money spent. I think that is a good development.

    The best development of the budget to my mind is the announcement that the FM is going to work on a unified goods and services tax. Hopefully, if we can have it in 3 years or so, that would be a key inflection point for the economy. Because what it means is that there is going to be one VAT rate in the country. So that tax would be much less, even if it is 18%-20%, it will be still be a lot less than all the indirect taxes put together today. That would lead to lower prices for consumers, of consumer goods. That will lead to higher consumption and almost all indirect tax evasion (sales tax, excise etc.) that takes place today will be eliminated. I would say that evasion would become less than 10% of what it is today. That means, the fiscal deficit of the government will also be under control. That is a very strong development. For the first time, the government has announced that the policy is to bring in this unified goods and services tax.

    I also think that the lower income tax on individual assessee’ and allowing them to invest Rs 1 lakh into any saving scheme, including mutual funds, to my mind, will bring in a lot of money into the stock markets. It will create an equity culture in India. Therefore, it is quite likely that in a year or two, the reliance on FII investments will reduce, as there will be greater domestic retail participation.

    The reduction in the peak customs duty rate to 15% is a good thing. Also, the decision to permit minimum alternate tax and credit towards future corporate tax is a good thing.

    I liked the finance minister’s emphasis on Mumbai’s transport project and working towards making it a regional financial hub. These are various positive points on the budget.

    EQTM: Any negatives from the budget?

    Mr. Godrej: In my view, there are two key negatives from this budget. One, the fringe benefit tax. I think it is quite absurd to tax things like travel. Now, when our salesmen travel, they are thinking that it is a ‘fringe’ benefit. If you talk to the salesmen, they hate to travel. They only travel because that is their job. They are away from their family for days together. To call it a fringe benefit is absurd. Certain things I can understand when categorized as ‘fringe’ benefits. But not things like travel. So, some of the provisions in the fringe benefit tax would have to be amended. To my mind, it is a badly formulated tax, disallowing or taxing legitimate business expenses.

    The second negative is the increase in surcharge on corporate tax from 2% to 10%. It is negative move. Whilst it may not affect the corporate tax, because the FM has reduced the corporate tax rate, so even including the higher surcharge the tax rate is less, but it affects the dividend distribution tax and the minimum alternate tax badly, because they also get surcharged. So, dividend distribution tax is going up from 13%, which is already a high level, to 14%. And this is a cascading tax.

    But overall, the positives are quite strong.

    EQTM: There have been strong reactions to the move to tax cash withdrawals of Rs 10,000 and above. What is your take on this?

    Mr. Godrej: I don’t have a view on that, because it’s a negligible tax. I am not in favour of such kind of taxes, but it’s so negligible that it hardly matters. So, I am not going to comment on that.

    EQTM: Finally, what is your outlook on the Indian FMCG industry post this budget?

    Mr. Godrej: I think that the FMCG sector should be doing quite well. The sector pre-budget, was doing quite well, the growth rate has been good. I think the budget will help in the long term. As the expenditure on rural development increases, there will be stronger demand in the rural areas. Post-budget, I think there will be more disposable income in the hands of the people. So, I presume some of it will go into FMCG. Typically, most assesses will benefit in the range of Rs 10,000 to Rs 25,000 per annum. That will create a lot of demand.

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