May 20, 2017 12:53 PM IST | Source:

Top 5 things you should know about GST if you are an investor in Indian market

Equity markets mirror the economic fundamentals and if GST is likely to add to that strength, investors have nothing to worry about.

The goods & services tax (GST) has moved closer to becoming a reality by July 1, 2017. The GST Council earlier this week fixed tax rates on 1,211 items and released the final list of GST rates for 98 categories of goods.

Although the market has already priced in all the good news about GST, but successful implementation is likely to boost the confidence of investors and improve earnings growth of companies has remained flat or in single digits for the past 4-8 quarters.

Equity markets mirror the economic fundamentals and if GST is likely to add to that strength, investors have nothing to worry about.

We have collated a list of five factors which investors should know about GST and how it will impact markets:

Push GDP rates by 2-2.5 percent

GDP growth is always seen as the strength of any economy. India is growing at a pace of 7 percent and some experts feel that implementation of GDP could well add another 2 percent to its growth rate over a period of time.

“GST will be a big game-changer in sectors such as logistics because most companies will save 1 percent at least on logistics cost of the total cost. It will be very difficult for any company to evade GST,” Rakesh Jhunjhunwala, Partner at Rare Enterprises said in an interview with CNBC-TV18.

“Compliance will bring tax efficiency and raise tax revenues. And, lastly, it will make the economy more and more digital because every return is going to be digital. I think it could raise gross domestic product (GDP) by 2-2.5 percent over a period of time,” he said.

Around 80 percent of the goods will attract 18 percent or less GST against 35 percent of currently taxed at 27 percent or higher. Effectively, the ushering in of GST will help reduce the prices for the end user.

“The articles of daily usage including milk, food grains have been exempt from taxation under GST regime making it easier on the pocket of a common man,” Arun Thukral, MD & CEO, Axis Securities told Moneycontrol.

“The markets have more than welcomed the new rates under GST regime. GST is a structural reform and is expected to accelerate the pace of GDP growth of India post implementation,” he said.

Earnings growth for companies

Implementation of GST will lead to higher economic growth and boost earnings for companies. “As tax rates on mass consumption items come down triggering inflation downtrend, economic growth will be bolstered and support the bottom lines of most firms. This sounds good news for the market as earnings will get better,” Arindam Chanda, Head, Retail Broking, IIFL Group told Moneycontrol.

Sectoral Impact

As GST is one of the biggest tax reforms to be rolled out, it would go on to boost the positive sentiment for the markets. “Sectors which could see a benefit due to the GST rates announced till now would include FMCG, utilities and other metal companies that use coal as an input, dairy, etc.,” Nitasha Shankar, Sr. Vice President and Head of Research, YES Securities India Ltd told Moneycontrol.

“Sectors that could see a negative impact include passenger vehicles especially in light of the cess announced for petrol and diesel vehicles. Post GST, we expect small to mid-segment cars to be impacted which in turn could translate into a gain for the two-wheeler segment,” she said.

Non-inflationary in nature

GST would replace 17 indirect tax levies and improve taxation efficiency. Most goods are placed under the four slabs of services tax i.e. 5, 12, 18 and 28 percent. The government is planning in such a way that GST rates will have no inflationary impact on the economy which means that inflation will remain under RBI control and there are higher chances of a rate cut.

At the same time, the focus is to tag essentials and consumer staples at zero or moderate rate while expanding the tax as the pyramid of the item increases. “We see the benefit to the economy given a deflationary structure to essentials and staple item given lower rate,” Vinod Nair Head of Research at Geojit Financial Services told Moneycontrol.

“Primary items command a good portion of retail inflation, we think that given a cut in effective rate CPI can consolidation due to the base effect. Additionally, as every entity avails input tax credit the effective tax to companies will reduce while government taxes increase due to transparency and accountability,” he said.

Nair further added that effective usage can provide an anti-inflation trend in the economy which will be a benefit to the market given RBI current concern over inflation and neutral stance.

Possible hiccups expected due to GST implementation

Analysts are raising concerns of possible disruption in the market due to the implementation of GST. Even though the government has tried to minimize the incremental impact of this regime change on most of the goods & services, but short term teething problems cannot be ruled out.

“We believe, for the initial year or two, GST rate may not impact prices much as (a) rates are in line with existing practice; (b) participants would take the time to adjust to the new system given competitive intensity and market share dynamics,” Saravana Kumar CIO LIC MF told Moneycontrol.

“As businesses are shifting from VAT-paid system to GST system, there are divergent trends in short term. Few companies are treating distributors as partners and are eyeing to indemnify them for one-time loss which distributors may incur while this change happens,” he said.

Kumar further added that most other companies are not taking inventory markdown risk on their shoulders. There may be short-term issues with respect to the availability of products for short time frame.
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