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18 Jul 2017

GST impact on infrastructure: It will cut multiple taxes but will affect cost of construction

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The new tax reform will pose several challenges for the infrastructure sector such as treating of works contracts as service contracts, the imposition of new tax rates on ongoing projects, and change in the costs of construction materials. The new tax reform will pose several challenges for the infrastructure sector such as treating of works contracts as service contracts, the imposition of new tax rates on ongoing projects, and change in the costs of construction materials. The new tax reform will pose several challenges for the infrastructure sector such as treating of works contracts as service contracts, the imposition of new tax rates on ongoing projects, and change in the costs of construction materials. However, the advent of GST is also expected to boost the infrastructure sector with the elimination of ´tax on tax’ and the introduction of input tax credit (ITC). Under the previous tax regime, it was a litigious issue of whether infrastructure contracts have to be treated as ‘supply of goods’ or ‘provision of service’ contracts, or as a composite works contract involving the supply of both goods and services. While Value-added Tax (VAT), a state tax, was applicable to the ‘supply of goods’, a service tax, a central tax, was applicable to ‘provision of service’. With the implementation of GST, these litigations will come to an end. The Central GST Act, 2017 (GST Act), specifically provides that ‘works contract’ as well as ‘construction of a complex or a building, civil structure or a part thereof’ shall be treated as the supply of services. Even though this provision will provide clarity to a great extent, it may not be able to eliminate ambiguity completely. Contracts in the infrastructure sector can be quite complex, and determining the nature of these contracts would be difficult. Under the previous regime, a majority of construction contracts, being work contracts, were subject to a combination of both service tax and VAT. A service tax of around 4.5% (assuming taxable component of the service contract is 30%) and VAT ranging from 1-15%, depending upon the state, was applicable to construction contracts. Thus, under the earlier regime, the effective tax incidence for an average construction contract, ranged from 11-18%. Moreover, there were several construction activities, such as the construction of roads, dams, irrigation, that were exempt from service tax. With the rollout of GST, the rate of 18% for works contracts is higher, and the difference is more prominent for construction activities falling under the service tax exemption category. However, this higher GST rate could be set off by the benefit of input tax paid and ITC on the raw materials. On the other hand, a higher GST rate could also result in higher costs, if there is limited scope for renegotiating construction contracts, and contracts that do not account for contingency factors. The cost of construction services will also be impacted due to credit restrictions provided under Section 17(5) of the GST Act. According to the aforesaid section, a contractor will not get ITC for the supply of works contract service for construction of an immovable property but can avail the benefit of ITC on construction services availed from the sub-contractor. Furthermore, the aforesaid section also provides that ITC shall not be available for goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account, used in the course or furtherance of business. Thus, these provisions are complicated and contradictory. We can see that implementation of the above-mentioned credit restrictions can have an adverse impact on the infrastructure sector. However, this does not seem to be the intent of the lawmakers, as seen from the ‘Schedule of GST Rates’, which clearly provides that full ITC will be available for the composite supply of works contracts. Thus, we cannot conclude that higher GST rate on works contracts will be neutralised by ITC until explanation and clarity are sought with respect to the aforesaid credit restrictions. GST would also make compliance easier by eliminating multiple indirect taxes. However, it would require contractors to register in multiple states owing to the requirement of registering at the place of supply of service. Contractors would also have to compulsorily register in a state where it supplies services but has no fixed place of business, owing to the concept of “casual taxable person”. These provisions will increase the compliance costs for construction companies. Furthermore, companies will have to incur the costs of upgrading their IT systems, as input credit would be available only after an online reconciliation of tax invoices. With the advent of GST, there will also be a change in the cost of construction materials. For example, a higher GST rate of 28% imposed upon cement would adversely impact construction cost. Similarly, electricity is not within the ambit of GST and input tax will be an additional burden for the infrastructure industry. We cannot conclusively comment on the impact of higher GST rate on the infrastructure sector, as there is still ambiguity with respect to credit restrictions. GST will boost the sector by eliminating multiple taxes and simplifying the law, but it will also impact the cost of goods and services used in construction and increase compliance costs. It is still very early to make a judgment on the new tax reform. We should wait till it concretises.

18 Jul 2017

FICCI's latest Manufacturing Survey finds improvement

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"FICCI's latest Quarterly Survey on Manufacturing suggests slight improvement in the manufacturing sector outlook in the first quarter (April - June 2017-18) of the fiscal as the percentage of respondents reporting higher production in first quarter have increased vis-vis previous quarter. More importantly, FICCI Survey suggests that the percentage of respondents reporting lower production has reduced considerably over the previous quarter thereby indicating a more positive outlook in months to come. The proportion of respondents reporting higher output growth during the April - June 2017-18 quarter has risen slightly from 47% January - March 2016-17 to 49%. Respondents reporting negative growth have come down to 17% in April - June 2017-18 from 27% as reported in the previous quarter, noted FICCI Survey. FICCI's latest quarterly survey assessed the expectations of manufacturers for Q-1 (April - June 2017-18) for eleven major sectors namely auto, capital goods, cement and ceramics, chemicals and fertilizers, electronics & electricals, leather and footwear, machine tools, metal and metal products, paper products, textiles and technical textiles, and textiles machinery. Responses have been drawn from over 300 manufacturing units from both large and SME segments with a combined annual turnover of over ?3.5 lac crore. However, the cause for worry was the rising cost of production (for a little over two-thirds of the respondents), the Survey noted. The cost of production as a percentage of sales for product for manufacturers in the survey has risen significantly as 69% respondents in Q-1 2017-18, against 60% respondents reported cost escalation in last quarter. This is primarily due to rise in minimum wages and raw material cost. In terms of order books, about 47% respondents in April - June 2017-18 quarter reported higher order numbers which is almost the same as that recorded in the previous quarter. Capacity Addition & Utilization The average capacity utilization as reported in the survey for the manufacturing sector is about 75% for Q-4 2016-17 which is similar to that of Q-3 2016-17. The future investment outlook remains less optimistic. Even now, 74% respondents in Q-1 2017-18 as against 75% respondents in Q-4 2016-17 reported that they don't have any plans for capacity additions for the next six months. Although, the bleak investment outlook seems to be waning if Q-3 2016-17 is taken into consideration (when 77% respondents had no plans for capacity addition). High percentage implies slack in the private sector investments in manufacturing is here to continue for some more months. Large volumes of imports, under-utilised capacities and lower domestic demand from industrial sectors and OEMs are some of the major constraints which are affecting the expansion plans of the respondents. On a broader perspective, in some sectors (like chemicals, capital goods, textiles machinery, cement, metals and paper) average capacity utilization has either remained same or declined in Q-4 of 2016-17. On the other side, some sectors including auto, textiles and electronics and electricals reported a rise in the average capacity utilization over the same period. Inventories As for the inventory levels, 87% of the participants in Q-4 (January - March 2016-17), as against an overwhelming 97% in Q-3 (October-December 2016), have maintained either more or same levels of inventory as their average inventory levels. Exports Export outlook of manufacturing sector for the first quarter of this fiscal also seems to be marginally improving as percentage of respondents expecting fall in Q-1 (2017-18) has come down from 22.8% in Q-4 (2016-17) to 18.5%. Hiring Hiring outlook for the sector remains subdued in near future as 73% of the sample participants in Q-1 2017-18 said that they are unlikely to hire additional workforce in next three months. However, when compared on a sequential basis, this proportion reflects a mild improvement over the previous quarter when 77% of the respondents were reportedly averse to hire additional workforce. Interest Rate Average interest rate paid by the manufacturers still remain high though have shown some sign of moderation with average rate of 11% but highest rates continue to be upwards of 14.5%. Sectoral Growth Based on expectations in different sectors, the Survey suggests that moderate growth is expected in metals, leather and footwear, machine tools and capital goods sector in Q-1 2017-18. Low growth is expected in sectors like chemicals, automotive, textiles and cement. Only in case of electronics and electricals high growth is expected for Q-1 2017-18."

18 Jul 2017

Cochin Shipyard proposes to issue IPO to finance infrastructure project

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The Cochin Shipyard Limited (CSL) has embarked upon two major infrastructure expansion projects - International Ship Repair Facility at a cost of Rs. 970 crore. and construction of new Dry Dock with a cost of Rs. 1799 crore. In order to finance these projects it has proposed to issue Initial Public Offer (IPO). The entire proceeds of the funds raised through IPOs will be used for partial funding of the projects.

12 Jul 2017

NGO: 158 Ships Hit South Asian Beaches in Q2

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"Out of 210 ships, which were broken in the second quarter of 2017, a total of 158 ended up on South Asian beaches for breaking, according to the latest report by NGO Shipbreaking Platform. The worst dumping country this quarter was Germany with 16 beached ships, a consequence of the multiple bankruptcies “due to the toxic financing that has been characteristic of the German shipping industry.” Other leading dumping nations were Singapore with 12 ships, Greece with 9, and South Korea with 8. Though 45 out of the 158 beached vessels this quarter were European-controlled, only four of these had a European flag. Nearly a third of all the ships sent to South Asia this quarter changed flag to typical end-of-life registries, St Kitts & Nevis, Comoros, Palau, Djibouti, Niue and Togo, only weeks before hitting the beaches. The worst company was the Singaporean Continental Shipping Line that had six Liberian-flagged vessels that all changed flag to St Kitts & Nevis or Comoros and were beached in South Asia. Quantum Pacific is a close runner-up on second place for worst dumping practices, with four ships sold to Pakistan and Bangladesh. Quantum has been under the Platform’s radar before as the worst dumper of 2015. The worst dumper of 2016 was UK-based Zodiac Maritime. The Platform was able to document five accidents at the shipbreaking yards in Chittagong, Bangladesh, between April and June, which led to the death of four workers and the injury of two. “The figures of this quarter not only show how legislation based on flag state jurisdiction will fail in changing the deplorable shipbreaking practices of the shipping industry, they also show that companies such as Quantum and Zodiac have no shame in continuing to exploit vulnerable workers in South Asia for the sake of extra profits,” according to NGO Shipbreaking Platform."

12 Jul 2017

US, India and Japan conduct naval exercises, Dragon keeps an eye

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"A rising Chinese presence in the Indian Ocean has prompted the largest naval exercise the region has seen in more than two decades. The United States, Japan and India have deployed front-line warships, submarines and aircraft as part of the tri-nation Malabar exercises in the Bay of Bengal. Conducted annually since 1992, Malabar has grown in size and complexity in recent years to address what the US Navy describes as a ""variety of shared threats to maritime security in the Indo-Asia Pacific."" Formerly a bilateral exercise between India and the US, Japan became a permanent Malabar member in 2015. This year is the first to include aircraft carriers from all three participating navies. The exercises, which officially began Monday, are intended to provide a ""symbolic reassurance that the US is committed to working with India to continue shaping the Asian security environment,"" said Constantino Xavier, a foreign policy specialist at Carnegie India. Rising China The buildup of naval power in the region comes at a time of increased tensions between India and China. China has steadily increased its naval presence throughout the Indian Ocean in recent years, part of an assertive blue-water strategy that aims to extend the country's operating ability far from Chinese shores. According to an IndiaSpend analysis of publicly available data, China's People's Liberation Army Navy (PLA-N) has 283 major surface combatant warships, four times more than those under the control of the Indian Navy (66). Delhi has long viewed the India Ocean as part of its immediate sphere of influence. The expansion of China's naval power -- and its submarine fleet in particular -- has forced Indian leaders to reevaluate the country's coastal defense policy. The Indian Navy has reported at least a dozen sightings of Chinese vessels in the region since May, including submarines. This year's Malabar exercises will for the first time include exchanges on anti-submarine warfare, patrol and reconnaissance, according to the US Navy. The Indian Navy has also sent its Sindhughosh class submarine and a P-81 long range maritime surveillance aircraft, underscoring the exercise's anti-submarine focus. Further north, India and China remain locked in an ongoing border dispute in the mountainous region of Doklam, on the unmarked border between China and Bhutan. Though not a part of Indian territory, the plateau holds immense strategic importance for Delhi and is vital to its geopolitical interests. Elsewhere, China's close ties with Pakistan -- the two countries recently agreed a deal that gives China access to Pakistan's Gwadar Port -- as well as the construction of China's first overseas military base in Djibouti have added to Delhi's military concerns. Global maritime community India has recently begun to take a more active role in working with regional partners to contain China's influence. Indian Prime Minister Narendra Modi's trip to the US in June, along with the US sale of surveillance drones to the Indian Navy, reaffirmed the two counties' relationship. And in June, US defense giant Lockheed Martin said it would build F-16 fighter jets in India if Delhi signs an order for as many as 150 of the single-engine warplanes. Meanwhile, Modi's courting of Japanese Prime Minister Shinzo Abe has accelerated in recent months, with the two leaders agreeing to ""strengthen coordination"" across a range of issues, including maintaining a free and open Indo-Pacific. That sense of openness will likely strike a chord in Beijing. The Bay of Bengal, where the Malabar exercise is taking place, is a strategically important waterway for China, due to its proximity to the Strait of Malacca. The Indian administered Andaman and Nicobar archipelago, several hundred miles northwest of the Strait of Malacca, provides India with a degree of territorial and strategic leverage over China. Notably, both India and Japan have declined to participate in China's One Belt, One Road project -- an ambitious series of interlinking trade deals and infrastructure projects throughout Eurasia and the Pacific. Key events planned during the at-sea portions of the Malabar exercises include submarine familiarization, air defense exercises, surface warfare exercises and anti-submarine warfare, according to the US Navy. (CNN) "

11 Jul 2017

Celebi Delhi Cargo Terminal goes live on Kale’s Galaxy – Air Cargo Management System.

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"Kale Logistics collaborates with Celebi Delhi as technology partner to provide Air Cargo Management System for Delhi Cargo Terminal operations. Celebi Delhi Cargo terminal went live with Kale’s Galaxy (Domestic module) Cargo Management system as part of the phase wise implementation of the entire suite of Galaxy Air Cargo management software system comprising of EXIM operations, Warehouse Management, UD, Invoice and Accounts and Domestic Operations. The new age domestic module incorporates next generation features like Mobile App, Customer Portal, Hand-held based app and EDI with Airlines. Celebi Delhi Cargo Terminal Management India Pvt. Ltd., is a Joint Venture between Delhi International Airport Private Ltd (DIAL) and Celebi Ground Handling Turkey which along with domestic operations also provides cargo handling and warehousing services to approximately fifty international schedule carriers. Celebi Delhi is the largest operations in Air Cargo for Celebi worldwide. In order to keep pace with the ever-increasing domestic cargo demands, Celebi Delhi has partnered with Kale Logistics Solutions to automate their Air Cargo and terminal operations. Air Cargo industry has reached a crucial point where a fast-track approach to digitalization is required to keep pace with competitive modes of transport. It is undergoing a tremendous transformation – moving from legacy systems to agile technologies in order to streamline its operations, reduce costs and optimize efficiencies. Mr. Ramesh Mamidala, CEO of Celebi Delhi Cargo Terminal Management quoted, “Modern day freight challenges need technology to enable innovative practices to move businesses forward. With our domestic operations going live on Galaxy, we look forward to greater automation of our operational processes and getting quick and comprehensive information on consignment and cargo tracking. This significant development will help to speed up shipment times, improve efficiency and reduce costs.” Being the capital of the country, Delhi has maximum number of flight operations and Celebi - Delhi operates one of the largest volume of domestic cargo movement out of Delhi airport. Topographically, Delhi is surrounded by many states and with a boom in e-commerce business, there is additional domestic freight movement which makes Delhi a top e-commerce hub of India. Speaking more on this scenario, Mr. Mamidala added, “Celebi - Delhi’s current domestic handling system was challenged by an increased load of cargo and connectivity issues. Hence we decided to move forward with the latest technology solution to cater to this demand. Kale’s Galaxy is the perfect solution, which, with minor customizations fulfilled all our requirements. We would soon be going live on our international operations”. Mr. Amar More, CEO, Kale Logistics Solutions says, “We are delighted to partner with Celebi and are extremely confident that our system will address all their concerns and realize the benefits of GALAXY in near future. Galaxy is a global application that is being used by worldwide airports that incorporate global best practices and prepare the industry to manage the demands of e-commerce”."

11 Jul 2017

Rupee rise to clip Q1 profits of exporters by 150-300 bps

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"* Limited pricing power and hedges leave sectors sourcing locally vulnerable The sharp appreciation in the rupee against the dollar in recent months is likely to have dented the first-quarter (current fiscal) profitability of exporters that source locally and have limited pricing power. Those having natural offsets such as sizeable imports, or foreign currency loans and currency hedges, would be less impacted. The credit profiles of a majority of exporters rated by CRISIL have weathered the currency appreciation so far, notwithstanding the impact on profitability. CRISIL’s analysis of the largest 10 export-oriented sectors from its rated portfolio shows leather, textiles, meat, seafood and basmati rice sectors were the most vulnerable to rupee strengthening. Foreign currency losses for these exporters – assuming everything else was business as usual – are estimated at 200-300 basis points (bps) of net sales during the first quarter, given the ~4% appreciation in the rupee. For exporters of pharmaceuticals and agrochemicals, the impact would be much lower at ~150 bps given that their imports provide a partial natural hedge. For the gems & jewellery sector, exports largely match imports leading to minimal impact. The information technology (IT) sector would be the least affected given the extensive hedging practiced there, but the extent of hedge in terms of time period will determine the impact on individual companies. At the net profit level, the impact would be 50-150 bps because of another offset – forex-denominated working capital loans – availed of by most exporters. Depending on the contribution of exports to sales, 50-90% of borrowings are foreign currency-denominated in the aforementioned sectors. Notwithstanding the forex losses, the credit profiles of exporters will only see a marginal impact. Leading exporters in IT, pharmaceuticals and agrochemicals sectors from CRISIL’s rated portfolio have high operating margins of 15-25%, and gearing under 1 time; they have sufficient cushion to absorb forex losses. Exporters in the vulnerable sectors, on the other hand, have increased their currency hedges and are also trying to adjust their prices to cushion the impact. The credit profiles in these sectors are driven by a combination of relatively inflexible-cost domestic sourcing, low profitability and modest credit profiles. However, they had managed profitability and credit profiles reasonably well in 2011 when the rupee had appreciated nearly 4%. Operating profitability had declined by less than 100 bps then because demand outstripped supply, and there was a comparable appreciation among competing currencies, too. Even now, basmati rice exporters are likely to offset majority of their forex losses through better realisation given strong and inelastic demand. Says Anuj Sethi, Senior Director, CRISIL Ratings: “While a majority of exporters have weathered the forex storm so far, any significant rise in the rupee from here would impact credit profiles of exporters in the vulnerable sectors. The rupee’s relative strength versus competing currencies, and business challenges constrain the competitiveness of exporters in some sectors.” For instance, challenges on the demand (IT, pharmaceuticals, leather sectors facing pricing pressure or sluggish demand in the US and Europe) and supply (leather, meat sectors facing availability issue due to cow slaughter ban) sides leave exporters rated below ‘CRISIL BBB-’ (moderate safety level), or those with limited hedging and pricing power, more vulnerable. The impact of further appreciation in the rupee on the credit metrics of exporters, and the measures taken to guard against future volatility, will be the key monitorables."

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