As of now, there are over 15 – 20 different taxes that the consumer directly or indirectly pays for while consuming products like cars, cement, mobile phones and other electronics, etc. Like one of our former prime minister had admitted, only a small percentage of the benefit of the total spend of the government reaches the masses, in this case, the consumer is paying a price much higher than what he should be actually paying due to the leakages in the entire value chain. Not only do consumers suffer due to multiple taxes eating into their hard-earned savings, the economy as a whole also suffers due to the delays that the entire supply chain goes through as goods take longer to reach destinations than they should as they waste idle time on state borders. It’s like having different countries within India when it comes to the movement of goods and services across state borders within India itself. GST
(Goods & Services Tax) seeks to bring about a comprehensive tax system for goods and services at a national level. Its key objective is to remove multiplicity of taxes to create a single national taxation system that seeks to pass on the tax to the last stage, the customer. GST is envisaged as a consumption tax so that while buying any items or services you don’t have to worry about the numbers of taxes being charged to you. You don’t have to worry about whether some of these are applicable or not. Going forward you have to pay a single tax for all items. Some of you who may have travelled to countries like Singapore may have experienced in your shopping, dining & consumption of other services.
Currently, the government has proposed a GST Council which will examine all the issues relating to goods and services tax and make recommendations to the Central and State Governments on parameters like rates, taxes, cesses and surcharges to be subsumed, exemption lists and threshold limits, Model GST laws, etc. The Council shall function under the Chairmanship of the Union Finance Minister and will have representatives of all state governments as members. Currently, the council has not fixed the GST rate yet. The current recommendation is in ~17-18% range while the revenue neutral rate for the government ( the rate at which the current tax collections will not suffer) is 15.5%. While over a period all goods & services in the country will eventually come under the ambit of GST, currently items like Real Estate, Petroleum & Petroleum products & Precious metals are not being covered.
But will it change your life overnight? Does not seem so. In the near term, this could be inflationary as services which are currently taxed lower (and contribute a large part of GDP) will be taxed higher; however, the impact will be transient. Over a medium to longer term however, significant improvement in public finances on this account and reduction of leakages in the system compounded with huge boost to efficiency in domestic production, exports & allocation of resources will benefit overall GDP Growth big time. According to estimates from the National Council of Applied Economic Research (NCAER), growth could increase 0.9% to 1.7%. The efficiencies will come from more efficient movement of goods across borders, less idling and leakages (in revenues) & lesser wastages on spoilage. The movement of labour will also become more efficient as manufacturing will be able to build scale where the factors of production are best available in combination. The impact on inflation is expected to be temporary and should be minimal in order to make the GST attractive. The current speculative rates also have a miniscule impact of less than 1% on aggregate inflation.
What if GST fails and has it been tried successfully lately? GST is a successful model in Singapore already. Remember the GST refund counter at Changi Airport? The success of the GST model in a developed market is proven. Amongst developing countries, Malaysia recently implemented GST in 2015 and has seen tremendous benefit. While the country expected GST to get 1.9% of GDP as revenue, they ended up getting 2.3% of GDP as revenue. Malaysia is now expecting 3.1% of GDP in GST revenue for 2016.
For market investors, the key question is which companies are beneficiaries of this major reform. While it is difficult to assess what impact or quantum of impact will come for each of the impacted companies, largely the following sectors are going to be key beneficiaries –
Consumption: Automobile companies are going to benefit big from this in multiple taxes being eased out as well as logistical efficiencies in the form of warehousing cost coming down. FMCG & Durable Goods will of warehousing cost coming down. FMCG & Durable Goods will largely benefit from the warehousing consolidation & multiple interstate levies easing out. consolidation & multiple interstate levies easing out.
Logistics & Supply Chain: While the sector may see a mixed bag, supply chain technology companies, containers, and cargo companies could see their business scale up as single-location manufacturing will pick up.
Building Materials including Cement & Paints are likely to benefit in form of lower duties; this is one of the higher taxed areas
Industrial Manufacturing will also benefit from the lower tax incidence; demand will pick up and better allocation of resources
Oil & Gas could face a negative impact since its inclusion is yet to be notified for implementation in GST ambit & could have impact of dual indirect taxation systems till then
The impact on remaining sectors is likely to be neutral to positive. For mutual fund investors, manufacturing & consumption themes will remain in focus while aggressive diversified equity schemes will be a good bet from a long term perspective.
By when do we get going with GST? GST will end up dismantling & changing a very large indirect tax system built over the years. However, work is underway already for this implementation. For implementation of the GST as planned from 1 April 2017, the same needs to be ratified by 50% of the state assemblies since the Parliament has already cleared it. With BJP-led government in power in 14 states, that shouldn’t be difficult. Three pieces of enabling legislation need to be approved – a central GST law (by Parliament), state GST law (by state governments), and an integrated goods and services tax law (by Parliament). For actual implementation, the IT infrastructure is already under development and testing by Infosys. We all remain hopeful of this implementation and reform playing out as envisaged.
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