The Goods and Services Tax (GST) rate cut - while hailed as a key economic reform - is unlikely to deliver an immediate boost to corporate profits, market experts said during a panel discussion on Network18’s Reforms Reloaded event in New Delhi on September 22.
Trust Group's Utpal Sheth said that while corporate tax cuts and interest rate reductions have an almost immediate effect on profitability and market valuations, GST cuts are indirect and take longer to play out.
“The most important driver for equity prices is corporate earnings. When you have a corporate tax cut, the impact is immediate and fully traceable. However, when you cut indirect taxes, it takes longer to reflect in corporate earnings,” Sheth added.
Back in September 2019, there was a direct tax cut in the budget following which the stock market had rallied. But Sheth pointed out the difference this time around. “...we had an indirect tax cut but no corporate tax cut, and long-term yields haven’t come down. So, I feel it will take a longer time - roughly 12 to 18 months - for GST cuts to reflect in corporate earnings.”
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Kotak AMC's Nilesh Shah cited examples from industries where GST rates fell from 18% or 12% to zero. Many of these companies previously received input tax credits of 5-7% which would ideally have been passed on to consumers. “Currently, firms are passing the full GST (relief) to customers, which means they absorb a 5% hit on profitability. In some sectors, this could result in an actual loss of earnings rather than an increase,” Nilesh Shah said, highlighting insurance as one example.
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The GST reform, approved at the 56th meeting of the GST Council earlier this month and effective September 22, has replaced the previous four-tier system with a simplified two-slab structure of 5% and 18%.
Overall, market experts welcomed the indirect tax rejig with Sheth describing it as “a very material reform, much needed,” as a sustained economic growth requires a rise in real per capita income, either through higher wages or lower prices.
Kotak's Nilesh Shah also underscored the importance of complementing supply-side reforms with measures that stimulate demand. “After a decade of supply-side changes - ease of doing business, banking cleanup, and supply creation - it is time to push demand. Stronger consumption can trigger a virtuous cycle: higher capacity utilization, private investment, job creation, and further demand,” he added.
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