July 25, 2016

Britain decided to leave the European Union in what was clearly a shock to the markets. A consensus put the possibility of ‘Brexit’ at 9% a mere few hours before the EU Referendum took place on the 23rd June. As results started flowing in, so did the markets tumble. Several index futures including the S&P and Stoxx were down 5%, hitting their lower limits for the day. The pound took a massive beating falling to a 31-year low. Brexit came at a time when markets have already been struggling due to a weak global economy and has added to the prevailing uncertainty.

Even though Indian stocks moved in tandem with the global risk-off sentiment driven selloff in stocks, the market has been relatively resilient in the immediate aftermath of the result, thanks in no small part to the rock solid fundamentals. That said, it is expected that emerging markets will struggle to attract capital. The uncertainty surrounding the economic implications of Brexit has caused money to move to safe havens. The biggest worry about the Brexit vote is that it has opened a Pandora’s Box. Emboldened by the Brexit outcome, groups opposed to the EU membership in other European countries have already started demanding their own referendums. Far right political groups and parties in countries such as France, Spain and Netherlands have already called for referendums and the public discourse surrounding an exit from the EU is slowly gathering pace with the increase in violent attacks in the European states. The immediate impact of Brexit and growing clamour from other nations is an increase in risk aversion when it comes to investing.


Gold had been trading in a bullish trend since the beginning of the Brexit fear – trading above 1300 now

Risk aversion was immediately visible with gold rallying 5% while oil fell by 5%. Among global currencies only the US Dollar and the Japanese Yen appreciated, strengthening considerably, due to their perceived safety. Currency depreciation is further expected to increase risk aversion. Bullion which has been trading in the 1200 – 1300 range since the start of the year saw an immediate jump, going past the psychological resistance at 1300 and has been trading over this for the past four weeks. Oil, which has been struggling in 2016, has noticeably reacted to Brexit and is currently trading in the low 40s. EURGBP has hit a two-year low, trading below 1.2000, for the first time since early 2014. British imports have just become about 10% costlier, a rather significant number! With the financial industry facing a very tough year in 2016, Brexit could not have come at a more inopportune moment.


EURGBP moves from 0.7650 to 0.8300 in a few days, a depreciation of more than 10% for the GBP

Among other uncertainties, the most significant will be those surrounding the Free Trade Agreements (FTAs) and the discussions around trade and investment with emerging markets such as India. The EU has played an important role in the formation of bilateral treaties for its member states. India’s FTA talks with the EU, including trade and investment, are now bound to go forward under the assumption that the frameworks drawn will not include the Britain, even though the divorce won’t be final till 2017, at the very least. India is also a significant exporter of capital to Britain. It is quite likely that India will need to take stock of its bilateral agreements with the UK separately. These factors are likely to affect the GDP growth rate with many banks dropping their forecast for India’s GDP growth rate in the last few days, with the most significant being IMF’s downward revision from 7.5% to 7.4%. While the direct trade impact on the rupee is limited, global risk could weigh down on the rupee in the short term.

While the uncertainties had an immediate impact on the markets, there are significant arguments to suggest that Brexit could prove to be positive to the Indian economy and Indian markets by extension, in the long run. As per EU rules, an EU member can only recruit a non-EU citizen unless there is talent shortfall. Brexit is likely to be a boost in the opportunities available for Indians in the UK. Britain is also expected to look outside the EU, specifically targeting India, China and the US with respect to stronger trade ties, as it prepares itself for the split from EU.


FTSE 100 (Candle) has been outperforming SX5E (green line) since the initial concerns immediately post Brexit

Turmoil in the financial markets is expected to persist in the face of these uncertainties but the perception is that the risk-off sentiment that has scared investors towards safer assets is temporary. Markets have adequately recovered from the shock in the last four weeks. UK’s benchmark FTSE 100 has, in fact, outperformed the Eurozone benchmark SX5E (Stoxx 500 Euro) since the initial drop immediately post Brexit. However, it is likely that the negotiations and potential developments discussed above could lead to further volatilities and investor fear. Policy responses will need to take these into account.


Written By –

Ravi Musti

Microsoft acquisition of LinkedIn – Demystifying the Network

July 5, 2016


The mega US$26bn acquisition of Linkedin by Microsoft, which will see world’s largest professional cloud joining hands with world’s largest professional network has caught the attention of users and professionals alike. Through the medium of this article, we attempt to break down various facets of the deal and try and make sense whether the acquisition is strategically and financially attractive for both the companies.



The all-cash transaction of US$26bn, which is expected to be financed primarily by debt will see Linkedin shareholders receive US$196 per share. The acquisition is the biggest in Microsoft’s history (Figure 1). Post regulatory approvals in the US, the EU, Canada and Brazil and with no competing bids expected because of the sheer size of the deal, the transaction is proposed to close by the end of the calendar year 2016.

Figure 1: Microsoft’s biggest deals


Post announcement of the deal, share prices of Linkedin surged by 47% to US$191.21 while share prices of Microsoft fell by 2.6% to US$50.14


Microsoft dominates the traditional workspace activities by offering a wide array of tools and is perceived as a ‘go to’ place for executing work; however, it has very few tools which connect different people electronically as they work (see Outlook and Skype). Through the acquisition of Linkedin, Microsoft seeks to encompass the entire workspace of an individual / corporate by virtually putting ‘desktop work’ on network and facilitating seamless interaction between the space inside and outside of the office.

Further, the deal helps Microsoft enter the consumer web boom – an area dominated by Google and Facebook while at the same time, ensuring it sticks to its core competencies (with Linkedin connecting office professionals). To leverage on the existing brand, Linkedin will retain its distinct brand, culture and independence with Jeff Weiner continuing as the CEO and reporting to Satya Nadella.

Speculations were also rife that similar technology / social networking companies may be acquired by the larger players having huge reserves of cash. Some of the reasons why such target companies look forward to being acquired include softening of the economy and inexperience in scaling up. Twitter, Groupon, Fitbit and LendingClub are some of the potential target companies; for that matter, share prices of Twitter jumped by 9% on news of the Microsoft-Linkedin deal.


Integration of Core Competencies
Figure-2Linkedin is proposed to be integrated into various Microsoft Office tools which will make learning of the outside professional world convenient and simultaneous. Quick profile checks before meetings, getting to know of live feeds and integration of information in silos are some of the major benefits.
Data Analytics and Artificial Intelligence
Figure-3Microsoft could build Linkedin into a major customer relationship manager software such as with the current analytics prowess at its disposal. The analytics and live feed provided by Linkedin can also be used in Microsoft Dynamics CRM. Cortana, the digital assistant provided by Microsoft will seek to manage professional life better with more information available.

Boost to the Stagnating Business of Linkedin

Linkedin shareholders received a premium of nearly 50% of the share price (price before the deal was announced); however, the share price at US$196 is still at a discount of 28% of the share price high that it had reached in early 2015. This has mainly been account of failure to meet expectations and stagnation in use of the platform.


With Linkedin now in a position to gain access to the large platform and distribution services provided by Microsoft, it seems to be a winning situation for Linkedin as it can leverage Microsoft’s resources which is also reflected in the rise in the price of its stock after the deal announcement

Other Major Benefits

  1. Microsoft is seeking to move more into the corporate customer segment rather than the conventional regular customer segment. Acquisition of Linkedin helps Microsoft gain valuable insights into the corporate world (such as impending project work)
  2. Linkedin had acquired a company (Lynda) that facilitated online learning and education. Integration into Microsoft products will enable greater accessibility and awareness of such programmes
  3. Cost synergies to the tune of US$150mm per annum expected by 2018


Operational Concerns – Microsoft’s Track Record of Acquisitions

Microsoft has been pretty infamous in dealing with many of its large acquisitions, especially the ones which are outside of Microsoft’s core domain. After the acquisition of Nokia, Microsoft has been busy firing Nokia employees as part of restructuring and has written down value of its investments. Microsoft actually wrote down this acquisition by $7.6 billion a year later about the same price at which it had acquired Nokia ($7.2 billion).  Skype promptly lost ground to better options such as Facebook and WhatsApp. Online advertising firm aQuantive, acquired to match Google’s advertising business failed because Microsoft did not know how to run it. Yammer has been relegated to an insignificant position in Microsoft.

Financial Concerns

Many experts have commented that the deal value is on the higher side. The consideration implies that Linkedin is paying US$247 for every current active user of Linkedin, which is a pretty steep amount in itself considering the revenue model of Linkedin. Thus, it is necessary that users keep on getting added on to the platform. However, there are concerns around the addition of new users given that Linkedin already has a registered user base of 430mm.

Behavioral Concerns

Users might be concerned about the use of information available on one portal on a different portal – something which even Mr. Nadella has acknowledged. Also, companies might not approve of employees using a social networking site during work hours, even though it might be useful.

Debt Financing

Inspite of the healthy cash reserves at Microsoft’s disposal, the use of debt for financing of the deal has raised certain eyebrows. Microsoft, one of only 2 companies in US with a AAA credit rating might see a possible downgrade in its rating by Moody’s with its gross debt increasing to 2 times EBITDA.


The larger opinion has been that at US$26bn, Microsoft has overpaid for Linkedin. The valuation was arrived at using 8.1x trailing 12 months revenue and 6.7x forward 12 months revenue, whereas TechCrunch has estimated that average SaaS revenue multiple for a publicly traded company is 4x – 6x.

We also ran an independent DCF valuation of Linkedin as a standalone entity (i.e. without considering the possible synergies on account of the acquisition) but reflecting risk profile of LinkedIn and its peers with an implicit assumption that over the time LinkedIn’s capital and the cost of capital will gravitate towards industry average. We arrived at price per share US$89.1 for LinkedIn (pre synergies). We have also provided a sensitivity analysis of our DCF with respect to the assumptions regarding WAAC and terminal growth. Our DCF analysis price is at a 35% discount to the pre-acquisition price of the LinkedIn (5 month average price before the acquisition announcement).  Microsoft’s acquisition at US$196 represents a step premium of 120% over the fundamental price of the LinkedIn.


The value of the investment thus arrived at was US$11.50bn indicating that the present value of the synergies that must be generated on the deal must be US$14.50bn. A back of the hand calculation shows annual post tax synergies till perpetuity must be US$786mm to justify the deal consideration, which is way higher than the US$150mm annual cost synergies expected by Microsoft. The deal has to accordingly generate sufficient revenue synergies for the purchase price to be justified.

Microsoft expects the deal to be EPS accretive by FY19. Our analysis, however expects the deal to be accretive only by FY20. Accretion improves with smaller offer premium. However, premium below 30% would have been highly unlikely to incentivize LinkedIn shareholders.


Based on the above calculations, the deal does seem to be risky for Microsoft in terms of generating its required returns and it might not have been a bad idea for a certain proportion of stock in the purchase consideration to share the risk so arising because of the uncertainty. This is exactly what Facebook did in its $22 billion acquisition of WhatsApp which was financed 82% by stock. In spite of the above calculations which are derived using rational assumptions, the Linkedin bet does not seem to be a bad one because of the quality of its user base as explained below.




The deal has evoked mixed reactions from different quarters. Credit Suisse sees the potential for strategic synergies between the two companies. UBS says the deal makes strategic sense but wonders whether there will be a culture clash between Microsoft’s more grown-up culture and the younger Linkedin. BMO Capital Markets, on the other hand suggests Microsoft could have done better for US$26bn. As interesting it will be to see the future paths of the merged entity, the deal could also widespread implications on consolidation in the global technology sector.


Exhibit: Brief Profiles of the Companies



Annual Reports of Microsoft and Linkedin, Microsoft Investor Presentation, Bloomberg, Reuters, The Economist, News runs, Data provided by Damodaran (NYU Stern)


Written By –

Mohit Pimpalkar

Yash Baheti

Known Unknowns! Grexit or Austerity?

August 3, 2015

Varoufakis, Greece’s ex-finance minister, is a professor of mathematical economics who specializes in game theory. But, his negotiating tactic was quite the opposite of what standard game theory would state. Varoufakis’s idea of a successful strategy was to hold a gun to his head and then demand a ransom for not pulling the trigger. “Stop and pay me, or I will shoot myself.” To put it in context, he threatened his European counterparts to forgive some Greek debt or suffer from a Greek default and exit from the single currency area. Why don’t we take a step back to understand how Greece built up its mountain of debt? It will help us reason whether the demands for austerity being placed by the Eurozone members are fair or unjust. It will also show us why the event of a Grexit has been so uncertain for any so-called ‘Economist’ to predict correctly!

One of the problems lies in the design of the Euro. Usually, when a given country’s economy falters, one of the easiest automatic stabilizers is for its currency to depreciate. Although, this reduces the countries’ real purchasing power, it has the benefit of boosting the country’s exports and tourism. In the Euro, this simply isn’t possible. A country that lacks this flexibility is more likely to suffer a long period of mass unemployment – which is what’s happening in Greece now. For a more in-depth historical analysis of the formation of the Eurozone and problems faced by its members, please read Appendix 1.

“Before the euro, Greece, in particular, was saddled with high interest rates since its economic policies were held in low esteem, and it was widely believed the country would need to resort to devaluations. When the euro came into place, those worries vanished — and, wrongly, were not replaced with worries about Greece paying off its debts — which lead to plunging interest rates for Greek bonds. This let both the Greek government and the Greek private sector go on an unsustainable borrowing binge that created extremely rapid debt-fueled growth. To meet the fiscal requirements to join the Euro, Greece fudged its accounts for many years in the 2000s to paint a rosy picture of its state of the economy. Greece’s actual budget deficits were 6.44% and 4.13%when they needed to be under 3% to be eligible to join the euro [1]. In retrospect, both the borrowers and the lenders should have known better” [2]

Was the Greek debt used for constructively? Let us have a look. The major causes for the astronomically high debts of Greece include the following: –

  1. Excessive government spending:

Greece allowed the wages of the public sector workers to nearly double over the last decade. Moreover, it also had one of the most generous pension payments in the world. Further, the retirement age in Greece is low by modern Western standards [6].

  1. High Tax Evasion:

The government was also unable to fix cases of tax evasions and henceforth could not fund the high outlays of its welfare programs. Since the expenses soared and the revenues shrunk, the balance had to be met through huge borrowings creating a debt trap for the nation.

  1. Access to cheaper capital:

Even before joining the Eurozone, Greece was one of the poorest economies in Europe. Raising capital in its currency (drachma) was difficult on account of the budget deficits. However, by entering, Greece adopted the Euro currency and enjoyed its credibility to secure capital at low rates that, in reality, it did not deserve.

  1. The 2004 Olympics:

Hosting the Olympics in 2004, which cost double the original estimate of €4.5 billion, only made matters worse for Greece. [5]

Thus, the borrowed funds were used to meet the revenue expenditures of the government, particularly for payment of interest on the debts it owed. This led to little or no funds being available for capital expenditure (for new assets) and, therefore, no substantial long-term revenues could be generated in the economy.

“Greece is sitting on a debt of over 300,000 EUR Million in the first quarter of 2015.” Further, “Greece recorded a Government Debt to GDP of 177.10 percent of the country’s Gross Domestic Product in 2014. Government Debt to GDP in Greece averaged 91.96 percent from 1980 until 2014, reaching an all time high of 177.10 percent in 2014.”[7] Figure 1 and 2 illustrate these points.

Figure 1



Figure 2



The high debt itself isn’t the sole root cause of the problem. Some argue that the crisis also stems in its poor handling. In simple terms:

  • “Greece owed a bunch of money to European private banks that it could not pay. As per Test Tube News, Greece has a total debt of $320 billion. (Break-up of creditors can be seen in Appendix 2)
  • Rather than have Greece default, and then possibly need to bail out their banks, European governments gave Greece giant loans so Greece could pay the banks what they owed.
  • This left Greece owing foreign governments money that it could not pay, which put Greece in a position of political subservience.

This succeeded in kicking the can down the road for several years (no small accomplishment) but it didn’t change the fact that Greece lacks the means to pay what it owes, and foreign governments lack the means to govern Greece.”[3]

Thus, there might be some value in supporting the hardline Greek negotiators in their arguments. It is surely not as straightforward to say that the Greeks need to cut back on spending, bring in a budget surplus and pay back the loans. With negotiation talks breaking down last week, the country has had to declare a Bank Holiday for the fear that most banks would experience a ‘run’ on their deposits. 500 of the 7,000 ATMs in the country ran out of cash over a single weekend, which then led to a daily withdrawal limit of 60 Euros. The government was forced to impose capital controls in the fear of a flight to quality. So, is austerity the only means with which Greece will be able to pay back the 330b Euro in debt that it owes to its neighbour and the IMF?

Agreed that austerity can hold the country’s credit rating it can bring weak promises that the government will have more to spend in the future, but is that enough to give hope to the consumers who face lower pensions and higher taxation? The referendum was a loud and clear voice from the Greek people to reject the austerity demands placed by Eurozone members [Appendix 3 lists out the austerity measures being placed]. It has certainly improved the cards that Greek Prime Minister, Alex Tsipras can play with while sitting at the negotiations with his European counterparts. Germany might be seen as ‘unfair’ if it doesn’t pay heed to the voice of Greek voters. In some cases, Germany is already facing the wrath of global political opinion for letting the situation reach this uncontrollable juncture where the Grexit looks quite likely.

As we write this article, the summary of the discussions on negotiations at Brussels has been released. Hot off the press: “Greece’s future in the common currency remained uncertain despite attempts by France to broker a compromise in the biggest crisis to face Europe since 2012.

Greek Prime Minister Alexis Tsipras looked set to bow to pressure to pass tough new reform laws, including on tax and pensions, and prepare further rapid reforms this month. But he and his creditors remained divided over other key issues, notably the role of the International Monetary Fund and a German-led plan to put up to €50bn in assets into an externally managed fund for future privatisation.

With the leaders’ tempers frayed, it was unclear whether this deal could be implemented in time to satisfy German Chancellor Angela Merkel and other critics to open the way to formal rescue negotiations — or to forestall Greece’s financial collapse.” [8]

The recent developments:

Greece voted a “No” for the bailout on July 5, 2015, demonstrating resistance towards the austerity and other terms of the bailout. The voting was succeeded by rounds of negotiations with other members to get funds through the European Commercial Bank. On July 13, Greece managed a provisional agreement bailout for 7 billion euros with the final prints of the terms expected to be discussed in the subsequent weeks.

The broader picture:

A Grexit ramification would not only be limited to financial and economic implications but also to culture and geo-political dimensions. The entire premise of the very existence of EU as a binding force will come into deep water. Greece has an uphill task to implement the stringent measures of reforms meted to them The Greece workforce has to play a pivotal role in the revival of its economy by enhancing its productivity and quality.

Appendix 1: History of the Eurozone & Debt Crisis:

The countries of the European continent had long strained relationships with its other member nations. After World War II, a dire need was felt to re-unite and re-establish the distressed economies from the damages of the war. With the fall of the Berlin Wall, unification of countries seemed much more probable.

Finally, The Masstrichit Treaty formed the European Union (EU) in the year 1993. Later, on 1st January 1999, Euro was launched as an identical currency for EU nations creating the Eurozone. It aimed to facilitate easier trade across the Eurozone and to lower the risk of exchange rate fluctuations. Out of the current twenty-eight EU members, nineteen members form part of the Eurozone.

The Eurozone Crisis:

It is the debt crisis that is being faced by several Eurozone members. It is the failure of the common Euro currency that ties together major European countries in an intimate but inconsistent manner.

Though a unified European Commercial Bank (ECB) was instituted to take care of the monetary policy, there was a lack of one consolidated fiscal policy. Many European countries are different from each other in ways of language, culture, customs and their economies structure. Hence, harmonious fiscal policies of the governments were required to acknowledge this diversity.

Further, with the joining of Greece, easier and more credit was available even to the weaker and debt-ridden economies viz. Portugal, Ireland, Italy, Greece and Spain (PIIGS). And it was believed that even if such economies failed to deliver, stronger economies like Germany would chip in and save the poor countries from bankruptcy.

As against Germany’s stringent policy regimes, indebted countries failed to maintain fiscal discipline and lavishly spent on retirement programs, employment allowances, etc. Moreover, funds were not directed towards the creation of new assets but were used up in meeting revenue expenditure. Further, on account of the relaxed lifestyles of the people, productivity decreased thereby contributing less to the economic output.

With a single currency across most of the European nations, lending became easier and, in no time, threads of businesses got intertwined in the whole of the continent. With the sub-prime crisis of 2008, easier credit was not made available to such weak economies. Defaulting in Asset generation and soaking more credit even for already borrowed money; the overall value of Euro got depreciated resulting in a domino effect.

Bail-outs were possible in conditions of strong fiscal austerity measures. However, due to political reasons and easy working lives of the people of these economies, austerity measures are not seen as effective. Moreover, these measures work only a tad bit as less of government spending means less of tax collection from the citizens and less of economic activity for the nation.

Appendix 2: Greek Debt by Creditor

  1. 47% ($150 billion) to European Financial Stability Facility (EFSF)
  2. 22% to Banks (European Central Bank, International Monetary Fund & Treasury Bill holders)
  3. 19% to other Eurozone Governments and
  4. 12% to Private investors [4]

Appendix 3: Austerity Demands

  1. Targets for government budget surplus, to 1, 2, 3, and 3.5 %of GDP in 2015, 2016, 2017 and 2018
  2. Value-added tax changes intended to bring a net revenue gain of 1%of GDP on an annual basis. This would:
    • Unify VAT rates at a standard 23%, which will include restaurants and catering
    • Include a reduced 13% for basic food, energy, hotels, and water
    • Include a “super-reduced rate” of 6% for drugs, books, and theater
    • Eliminate discounts, including on islands.
  3. Pension related commitment to legislation to discourage early retirement
  4. Raising corporate tax rate from 26 percent to 28 percent
  5. Introducing a tax on television advertisement
  6. Extending tax increases on luxury vessels


[1] “Real reasons behind the Greek crisis: inefficiency and a fudged budget deficit”.

[2] and [3] “11 things about the Greek crisis you need to know”;

[4] “Why Does Greece Have So Much Debt?”

[5] “Greece: why did its economy fall so hard?”

[6] “An Idiot’s Guide to the Greek Debt Crisis.”



[8] Greece’s Eurozone future uncertain as Germany steps up pressure

Goods and Services Tax

June 19, 2015

— by Tejaswi K., PGP Student, IIM Ahmedabad



The word tax is derived from the Latin word ‘taxare’ meaning ‘to estimate’.

Taxation has four main purposes or effects: Revenue, Redistribution, Re-pricing and Representation. The primary purpose of Taxation is revenue generation. Taxes raise funds to spend on roads, schools, hospitals, and on other indirect government functions like market regulation or legal systems. The second purpose is redistribution, which means transferring wealth from the richer sections of society to poorer sections. Third purpose is re-pricing of certain goods to increase or decrease their consumption. Taxes are levied to discourage consumption of certain items like say tobacco. The fourth effect of taxation is representation, where the citizens by paying taxes demand accountability in return from the rulers or governments. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects. They are defined as follows:

  1. a) Direct Tax – It is the tax paid to the government directly by the assesse. The Income Tax, Wealth Tax and Corporate Tax are classical examples of direct taxes in India.
  2. b) Indirect tax – The taxes are paid indirectly and this tax is levied on goods or services rather than on persons or organizations. The excise duty, customs duty, sales tax and service tax are examples of indirect taxes.

Majorly, taxes in India are levied by the Central Government and the State Governments and some minor taxes are also levied by the local authorities such the Municipality or the Local Council. The authority to levy a tax is derived from the articles made by the Constitution of India and the Union List, State List and the Concurrent List enumerated in the Seventh Schedule of the Constitution.

Goods and Services Tax

Goods and Services Tax is a broad based and a single comprehensive tax levied on goods and services consumed in an economy. GST is levied at every stage of the production-distribution chain with applicable set offs in respect of the tax remitted at previous stages. It is basically a tax on final consumption. In simple terms, GST may be defined as a tax on goods and services, which can be levied at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider may claim the input credit of tax which he has paid while purchasing the goods or procuring the service.



Need For Goods and Services Tax in India:

Kautilaya’s Arthasastra said that the best taxation regime is the one which is “liberal in assessment and ruthless in collection”.

The present system allows for multiplicity of taxes being collected through an inefficient and non-transparent system, the introduction of GST is likely to rationalize it and thereby plug the loop holes in this system. This will enable the government to stop pilferage and rationalize the overall taxation regime. While many areas are either under-taxed or non-taxed or over-taxed, the GST will help reduce overall tax burden of many organizations.

Introduction of an integrated Goods and Services Tax (GST) to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment. Increasingly, services are used or consumed in production and distribution of goods and vice versa. Separate taxation of goods and services often requires splitting of transactions value into value of goods and services for taxation, which leads to greater complexities, administration and compliances costs.

Further, Indian economy is opening up to the global markets and many Free Trade Agreements (FTAs) were signed, which allows imports into India at no duties or at very low duties. Hence, there is a need to have a nation-wide simple and transparent system of taxation to enable the Indian industry to compete not only internationally, but also in the domestic market. Integration of various Central and State taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST being a destination-based consumption tax based on VAT principle, would also greatly help in removing economic distortions caused by present complex tax structure and will help in development of a common national market.

Many countries, provide tax exemptions to all goods and services that are exported so as to be competitive in international markets and also to encourage exports. This would not be possible in India right now, due to the opaque indirect taxation system present which will make it difficult for us to measure what is the true cost of production for the good/service and what is the tax that was levied on it. Due to this, India has historically been at a disadvantage compared to other countries in International markets.

A basis pre-requisite for introduction of GST meaningfully is that both the Centre and the State should replace existing taxes like Excise, State Sales Tax/ VAT, CST, Entry Tax and all other cascading-type Central/ State levies on goods and services. Any losses on account of abolition of multiple taxes are likely to be balanced by the additional GST revenues that will obtain from taxation of services and from access to GST on imports. Moreover, India would obtain full efficiencies of a single national VAT, while retaining a federal structure. This would also be the logical conclusion of the efforts that have been made in the country during last 2 decades in moving towards VAT

Benefits of GST:

The benefits of GST legislation will be uniformity of laws across the board, greater transparency, neutrality in tax rates on various products; credit availability on interstate purchases and reduction in compliance requirements. If GST is implemented in the true spirit, it will have many positives for the stakeholders and will lead to a better tax environment.

The implementation of GST would ensure that India provides a tax regime that is almost similar to the rest of the world. It will also improve the international cost competitiveness of native goods and services. Further it will also encourage an unbiased tax structure that is neutral to business processes and geographical locations.

Implementation of GST will also remove several roadblocks in the existing taxation system in India. Some of these are:


  1. a) Tax cascading: The Goods and Services Tax Act will overcome the problem of tax cascading through input tax credit mechanisms. Under this system, sellers or vendors of goods and services are eligible to avail tax credits on the amount of GST paid to eligible procurements. Manufacturers can avail credits for the GST paid to procure inputs, capital goods and services used in the manufacturing process. In the same way, wholesalers and retailers can avail credits for the GST paid on procurement of stock. But the final customer who purchases the product for consumption will not be able to avail and utilize any tax credit.


  1. b) Complexity: Presently in India, for taxing sale of goods, there is Central Sales tax and respective VAT Acts for each state and Union territory. The Goods and Services Tax will remove this complication by having a unified code for implementation of State GST in different states. The GST will not only subsume a large number of indirect taxes but also solve the classification issues by introducing only one or two rates of tax. Other than this there would be categories that are exempted or zero rated.
  2. c) Double taxation: The GST will not make any difference between goods and services as GST will be levied at each stage in the supply chain. This will help in solving the problem of double taxation. The issue is not only between the taxes of customs duties, excise duties and service tax but also between service tax and VAT. The implementation of GST will resolve the dilemma of a large number of assesses who are not sure of application of the type of tax on certain specified transactions like software development, sale of sim cards by telecom operators, online subscription of newspapers, value added services provided by telecom operators, right to distribute movies etc.


  1. d) Composite contracts: There are a large number of works contracts which involve the supply of goods and services which are available to customers under different supply chain arrangements. Such situations arise in a gap or overlapping in taxation of goods and services as the States do not have the power to impose tax on services and the Centre does not have the power to impose tax on sale of goods within the state. In such cases, a comprehensive solution can be provided only by implementation of GST. The introduction of GST along with prudent accounting policies, transparency and supported by a robust electronic controls will bring down the peak rates of taxation and enhance revenue growth.


Salient features of GST:

  1. It would be applicable to all transactions of goods and service.
  2. It is paid to the accounts of the Centre and the States separately.
  3. A two-rate structure -a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items.
  4. GST will be levied on import of goods and services into the country.
  5. The rules for taking and utilization of credit for the Central GST and the State GST would be aligned.
  6. Cross utilization of ITC (Input Tax Credit) between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods.
  7. The Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.
  8. The taxpayer would need to submit common format for periodical returns, to both the Central and to the concerned State GST authorities.
  9. Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits.


Taxes to be subsumed under the GST:

Taxes or levies to be subsumed will be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services. The subsumation should result in free flow of tax credit in intra and inter-State levels.

The following central taxes will be subsumed under the GST:

  1. Central Excise Duty
  2. Additional Excise Duties
  3. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
  4. Service Tax
  5. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
  6. Special Additional Duty of Customs – 4% (SAD)
  7. Surcharges and Cesses

The following state taxes will also be subsumed under the GST:

  1. VAT / Sales tax
  2. Entertainment tax (unless it is levied by the local bodies).
  3. Luxury tax
  4. Taxes on lottery, betting and gambling.
  5. State Cesses and Surcharges in so far as they relate to supply of goods and services.
  6. Entry tax not in lieu of Octroi


Problems with GST:


The GST which has been pending since 2006, is stuck at a crucial stage where states have been proposing to keep products such as petroleum, tobacco and alcohol out of GST ambit and had demanded that the exemption list be included in the Constitutional Amendment Bill. As regards the compensation structure, the states have sought a five year compensation mechanism from the Centre and demanded the same be included in the Constitutional Amendment Bill.


Some States believe that they will suffer revenue losses for example, Maharashtra, earns more than 13,000 crore annually from octroi. Gujarat, on the other hand, earns about 5,000 crore from the CST. Agrarian States such as Punjab and Haryana earn more than 2,000 crore from purchase tax. Each of these States fear that they will lose these revenues once these levies get subsumed under GST. If there is a loss in revenue, how will states be compensated?


To pass GST, a third category of constitutional amendment is required, which follows a very rigid process for constitutional amendment. To pass such a constitutional amendment, the bill has to pass in both houses by a special majority (by majority of total membership in the house and also by “two-thirds” of the members of the house “present and voting”). After passing in both houses, it should also be ratified in at-least one-half of the state legislatures before sending it for the President’s assent. Later the Centre and State will have to pass separate bills so that the new tax regime takes effect. This would be the 122nd amendment for the constitution.


Challenges in implementation of GST:


  1. What preparations are required at the level of Central Government and State Government for implementing GST?
  2. Is the Government machinery in place for such a mammoth change?
  3. Are the tax-payers are ready for such a change?
  4. What impact can it have on the revenue of the government?
  5. In what respect, it will affect the manufacturers, traders and ultimate consumers?
  6. How will it benefit the small entrepreneurs and small traders?
  7. Which type of administrative work will be involved in complying with the GST requirements?

Recent developments:


The threshold limit for levy of GST on goods and services is fixed at ₹ 10 lakh of annual turnover (this is to avoid levying tax on very small traders whose annual turnover is smaller than ₹ 10 lakh) ; the threshold limit for compounding scheme is fixed at ₹ 50 lakh with a floor rate of tax at 0.5 per cent, i.e. All traders whose annual turnover is between ₹ 10 lakh and ₹ 50 lakh need not apply for input tax credits and pay the GST but only pay 0.5% of annual turnovers as tax. This is to facilitate easier collection from small traders. Alcohol consumption is exempted from the bill. The Centre will levy an additional 1% tax on supply of goods in the course of inter-state trade. The states will be compensated fully for revenue loss in next three years and partially for fourth and fifth year.


The bill seeks to establish GST council which would be taxed with optimization of tax collection for goods and services by Centre and state. The council will consist of Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each State government. The GST Council will be the body that decides which taxes levied by the Centre, States and local bodies will go into the GST; which goods and services will be subjected to GST; and the basis and the rates at which GST will be applied. It will be up to the council to decide when GST would be levied on various categories of fuel including crude oil and petrol


Finance minister Arun Jaitley proposes to roll out the bill from April 1, 2016. Lok Sabha has passed the bill on May 6th 2015. Now all eyes are on Rajya Sabha as Government does not have majority vote there. Rajya Sabha has asked a 21 member committee to submit its report in the first week of monsoon season.




The taxation of goods and services in India has, hitherto, been characterized as a cascading and distortionary tax on production resulting in mis-allocation of resources and lower productivity and economic growth. It also inhibits voluntary compliance. It is well recognized that this problem can be effectively addressed by shifting the tax burden from production and trade to final consumption. A well designed destination-based value added tax on all goods and services is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass through, and the tax essentially ‘sticks’ on final consumption within the taxing jurisdiction.


A ‘flawless’ GST in the context of the federal structure which would optimize efficiency, equity and effectiveness.


Further Reading:



A Study on Proposed Goods and Service Tax Framework in India

Union Budget 2015 – The Other Perspective

March 15, 2015

— by Vineet Gupta, PGP Student, IIM Ahmedabad

The NDA government, equipped with an undisputed majority in the Parliament, with the aspiration to disrupt UPA’s socialism, was expected to uncover a plan for structural changes. But largely, the budget does not meet the expectations. It has some positives, and with an effective execution, they will be impactful. But several key and persistent problems have been left unanswered.

This was an extraordinary budget for 3 reasons –

  • Firstly, being the 1st fiscal budget of the new NDA government, it was anticipated to display a plan for the next 4 years.
  • Secondly, Its is the first undisputed majority in the Lower House in last thirty years, and the elections were contested on the grounds of revolutionary changes.
  • Thirdly, there is an extraordinary chance for an important change in spending due to the closing of Planning Commission, and the Finance Commission’s advice on higher resource allocation to states.

Economic Consolidation

NDA government was expected to bring about fiscally effective announcements in this budget. This was due to several factors in favor of NDA. The government received great economic relief due to the reduced crude oil prices via reduced subsidies. To the government’s credit, NDA has put several efforts for reducing petroleum subsidies. Also, the Finance Commission’s recommendation to expand the resource share of states (32% to 42%) does not impact the finances of center, as it just brings the spending to the state government (which is the right place). Further, the shutting down of planning commission gives a much-needed opportunity to the government to repair the broken financial system.

The estimates of the budget are grounded on GDP growth of 8% and a low inflation of 5%. The new GDP estimates are very stimulating as they show a stronger economy.

To save the Indian credit rating was teetering from getting sub-graded, Chidambaram had made a sincere commitment for a fiscal adjustment, to which the markets had responded positively. Jaitley has unfortunately announced to modify this plan by seeking another year to get to the 3% target. This is not a wise step as the economy will be stronger with better fiscal policy. And if the rationale was increasing the investments, the money should have been generated from disinvestments of sectors not needing government or reducing the skyrocketing subsidy bill. Deserting the fiscal reforms is not the correct way for public investments.

The end of Planning Commission

The failures of the Planning Commission are well known and are regarded as central to many economical failures of India. NDA took a strong progressive step by abolishing this body. But this step requires a parallel re-engineering of government for ensuring accountability. This can be done by the help of non-government agencies which measure that the ministry has delivered on its commitments. And any failure in this should have consequences. This is the way the fiscal systems work in developed nations.

The budget has done some re-engineering needed due to this, but only minimal. Most of the schemes that were a part of Planning Commission (PC) have not been terminated. The budget appears to ignore the fact that PC has shut down.

On the other hand, Niti Ayog, which was established for being a think-tank, has been allocated thousands of crore. This is not what a think-tank expenses are like. It appears as if just the name “Planning Commission” has been taken away, the processes and budgetary allocations remain the same.

Tax policy and tax administration

There has been an announcement to reduce the top corporate tax rate to 25%. Though this is a positive move for providing a much-needed impetus to the infrastructure and manufacturing, few have coined this as a measure to make the rich richer.

It has been announced that a good GST will be built. The impediment is its implementation. The Finance Ministry has come up with a plan to implement GST from 1st April 2016 onwards. There is still a period of one year for removing the difficulties in the implementation.

Financial sector reforms

There have been several key financial sector reforms:

The government bond market has been merged into SEBI and there has been an announcement to setup a Public Debt Management Agency. In relation to international finance, setting up an International Financial Services Centre has shifted the regulatory power on FIIs via equity to the Government. The RBI has signed a Monetary Policy Framework Agreement mentioning a below 6% inflation target.

For building a deeper institution, there have been announcements to establish commercial divisions in courts and setting up of a Financial Redress Agency. Further, for Pension based reforms, there have been proposals for social security and increase in deductions for pension funds.

Infrastructure Reforms

There have been a slew of investments in infrastructure, though not meeting the expectations set before the budget announcements. Spending on roads and railways are up by 14k crore and 10k crore respectively. Further, off-balance sheet borrowing is up by 20k crore. Adding all these investments come out to just around 0.38% of GDP. Hence this area has been poorly looked at in the budget.

Jaitley has come up with an idea of stimulating the PPP model in infrastructure development. By making the government hold a greater part of the risk, the idea is to rebalance the risk in these projects. Though the idea is great but it introduces threat of losses and possibilities of private partners contributing to just riskless aspects of the project like construction. Adding to this, the governments history of selecting the projects has been dismal I, thus shifting the burden on itself is a very poor idea and might to more harms than goods.

There have been some positive reforms too: there is an announcement of new law on procurement and dispute handling. There has been an initiative to bring about new law on regulations in infrastructure.

In conclusion, though the budget has promised a slew of reforms and policies that are pro-economy, the budget has disappointed us in many aspects. There have been many positive initiatives and announcements, but the government still needs to chalk out a measured and properly managed plan to bring about these reforms.

Let’s see what the future has in store for India.

Money Manager 7

January 14, 2010

Beta, The Finance Club of IIMA, in association with the Finance clubs of IIMB and IIMC, publishes the “Money Manager”, a pan-IIM finance magazine. The seventh edition of the magazine has been brought out by Beta, with support from Brics Securities and GACL, in January 2010. It was launched at the IIM Ahmedabad Finance Conclave 2010.

The theme of this edition is “Risk Management: Enhancing Value in Uncertain Times” and attempts to peer into the future of this discipline, its relation with the recent crisis and how it can be used by firms to create sustainable competitive advantage.

Special features include:

a) Lessons in Risk Management – Prof. Shrikant Datar, Harvard Business School

b) Markets 2.0 – the Changing Face of Finance – Mr. Ranodeb Roy, Head of Morgan Stanley Asia’s Fixed Income Division

c) Regulating the New Normal – Prof. Charles Jones, Columbia Business School

d) Winning student entries

To enable the Money Manager to reach a wider audience, it will be available for download online. To download, please visit:

inFINity – The Fachcha Finance Quiz

September 25, 2009

With a fresh new set of ambitious faces joining the ranks of IIMA students as part of the PGP-1 batch, Beta welcomed the batch with utmost enthusiasm and energy. As part of this effort, Beta organized “InFINity – The Faccha Finance Quiz” – an event aimed at promoting greater interest in the PGP-1 batch regarding the world of finance. The quiz attracted an eager response from the Facchas with over 70 teams of two members turning up for the event which was held on 3rd September, 2009.

The quiz began with two elimination rounds for all the teams. The questions covered a broad range of topics from within the financial world, ranging from financial current affairs to basic business jargon. After a closely contested elimination phase, 5 teams made it to the final rounds. The final rounds stepped up the competition – as a variety of rounds with different formats such as “Connect the Images” and “Guess Who” rounds tested the all-round awareness levels of the students. Teams had to be quick and innovative in their thinking to answer a diverse range of unconventional questions regarding the financial world. In what turned out to be a cliffhanger, the honors were taken away by Glen D’Silva and  Sayali Kale who emerged first. Aashwit Mahajan and Gourav Dhavale won the second prize. The winners took home gift vouchers of Crossword, and the bragging rights of having aced a Beta quiz.