The biggest tax reform of India, i.e., the GST or Goods and Services Tax, will become a reality from 1st July 2017. All of us are wondering about the impact of GST on the economy, investments, mutual funds, stock market, and real estate.
Impact of GST on Economy
All current applicable indirect taxes will get replaced by the GST. Some services and goods will become less expensive, while others will attract additional taxes. The GST rates may result in decrease in inflation, but there may not be significant improvement in economic growth in the short term. However, the Goods and Services tax will be beneficial for the government and India Inc in the medium term.
The lower GST rates for goods will most likely result in decline of inflation. GST will cause more number of smaller companies to come under taxation and hence they will need to go for business reorganization after the change to GST.
Some of the impacts of GST on the economy are mentioned below:
- Passage of lower tax benefits to consumers: Anti-profiteering measures are included in the GST laws, but there are many doubts about its implementation. Thus, there is no surety of the lowered tax benefits being passed on to the consumers by corporates. Some benefits may be passed on, but a large percentage of the savings from lower taxes in logistics, input credits inflow, streamlined business methods, etc., will most likely be used by corporates for new capacity investments and improved profit margins.
- Restructuring of corporate operations: Tax evasion by firms will be nearly impossible after GST; hence companies will insist on invoices by suppliers and vendors. Smaller companies will need to bear additional compliance costs, while a better orderly supply chain network will benefit bigger firms as it will make up for the taxes on inputs and result in cost savings. Also, there will a gradual shift from unorganized trade to an organized one.
- Reduced inflation: Goods and Services Tax rates for essential goods like household items, food grains, etc., as well as essential services have been kept low or are exempt. But increased tax compliance will increase tax burden on companies and they will most likely pass on the additional burden to consumers at a later period. GST does not include services like education, health, transportation, and miscellaneous segment. Hence, its impact on CPI will remain minimal and average inflation will be around 4 to 4.5 percent for the period 2017-18.
- No immediate economic growth: Economists are currently unsure of the effect of GST on economic growth; some say it may hamper growth in the short term as smaller companies lose revenue while bigger ones focus on reorganization of their supply chain processes. The economy is most likely to benefit in the medium or long term. For 2017-18, the economy is most likely to grow at 7.4 percent. Also, in the later years, GST will enhance investor sentiment, boost ease of doing business, and attract higher foreign investment, etc. which will be positive for growth of the economy.
- No rate cuts by RBI in June: Even though inflation will touch record lows, any policy interest rate cut by the RBI in June is highly unlikely. The Central Bank will most probably assess the effects of the GST and the progress of monsoon before taking a call on interest rate cuts.
Impact of GST on Investments
- GST will remove the current multiple tax slabs and consolidate it into a flat rate. Its effect on investment will only be known in the long term. The new tax regime will create a level playing field between the unorganized and organized trade sectors.
- Open and free markets will lead to more investments which will bolster the economy. Increased access to multiple investment options will bring in more players into the market. Investors can combat any form of future market volatility by remaining invested for long periods and looking out for market corrections on investments.
- Abolishment of excise & customs duty, octroi duty, etc. will result in large scale benefits for logistics industry. Stock market and investment experts state that after implementation of GST stocks of companies dealing in plywood, FMCG, consumer durables, logistics, battery, wires and cables, small car and other automobiles, cement, and infrastructure will do quite well.
- PPFs, bank fixed deposits, and other low-risk secure instruments will remain unaffected by GST. Premiums for general insurance and life insurance policies will increase post GST. Different banking services, fees, and charges will also see an increase in costs.
Impact of GST on Mutual Funds
- A lot of investors in mutual funds are currently wondering about the impact of GST on their investments. The new tax system will have an adverse effect on mutual funds, but that effect is going to be marginal.
- The service tax on mutual fund investments has been increased from 15 percent to the flat rate of 18 percent. This will cause the mutual funds to become slightly more expensive. Also, higher expense ratio means that the mutual scheme returns will be lower.
- It may be noted that distributors who earn less than INR 20 lakhs per annum are exempt from GST taxes. Also, the expenses that asset management companies or AMCs can charge are capped by the GST laws. Thus, charges to mutual fund investors are most likely to increase by around 3 to 4 basis points.
- There will be no significant impact of GST on mutual fund investments, other than a raise in the total expense ratio or TER. Investors do not need to change their investment plans or strategies after GST implementation.
Impact of GST on Stock Market
The GST has brought within its ambit just about all the sectors. The GST rates for some items like gold and bidis, etc. will be decided in June.
Discussed below is the impact of GST on different sectors and its stocks.
- Automobiles: Cars will be taxed at 28 percent along with a cess ranging from 1 to 15 percent. Cess for smaller cars is between 1 to 3 percent while luxury cars will attract a 15 percent cess. Two wheelers will be taxed at 28 percent; those with over 350 CC engines will come with an additional 3 percent cess. Automobile stocks for most segments will most likely remain unaffected after GST implementation. New cess on diesel and petrol vehicles may impact mid-segment cars, which may lead to gains for two-wheelers.
- FMCG/Fast Moving Consumer Goods: Tax for mass consumption products like soaps, hair oil, toothpaste, etc. has been reduced from current 22-24 percent to a flat 18 percent. Grains, milk, cereals do not attract a GST tax. Items like edible oil, tea, sugar, coffee, etc., will have a 5 percent tax. This means that food section of FMCG sector will gain most benefits from GST. Stocks of FMCG businesses like Dabur, Nestle, Marico, Colgate, etc. will do well post GST.
- Cinemas and Multiplexes: Movie tickets are going to be taxed at the highest rate of 28 percent. Currently, service tax for cinema halls is 15 percent along with 28 to 100 percent state entertainment tax. All of it will be consolidated into one GST tax rate of 28 percent which will significantly reduce costs.
- Capital Goods and Consumer Durables: Instead of the current 28 percent tax, all industrial intermediaries and capital goods will be taxed at 18 percent under GST. Some consumer durables will have increased effective taxes leading to increase in their prices to offset higher tax and cost pressures. Cables, air conditioners, fans, refrigerators, and transformers, etc., have been put in the maximum 28 percent tax category. The stocks of companies like Havells, Voltas, and CG Consumer may do better after GST as more firms will be brought under the organized sector thus reducing unfair competition from companies in the unorganized market.
- Coal, cement, and steel: GST on metal ore and coal has been reduced to 5 percent, while tax on cement has been increased from 24-25 percent to 28 percent. Tata Steel, JSW, and other power and steel companies with heavy dependence on coal will also gain from reduced coal taxation.
- Services: Currently there is a standard 15 percent tax on all services. GST will replace this with tax divided into 4 slabs of 5, 12, 18, and 28 percent. Transport services will attract GST tax rate of 5 percent and thus stocks of economy flying aviation companies like Indigo and Spice Jet are most likely to benefit from it. Tax on financial services and telecom will increase to 18 percent
Impact of GST on Real Estate
- Real estate involves high value transactions and hence even minor increment in taxes will significantly raise real estate costs. As per GST, work contracts have a 12 percent tax and a large chunk of construction items taxes ranges between 18 and 28 percent. But these may be offset by input tax credits. Thus, from a cost point of view the impact of GST on real estate will be neutral.
- It may however be noted that the outcome will largely be dependent on proper tax credits claiming system and correct GST implementation. Currently, there is a construction cost service tax of about 30 percent of the total value of a property that is under construction or being built by a builder hired by a consumer. There is no clarity on whether this system will change or continue. Increased clarity by the government on input tax credit gains for developers, abatement rules, and other facets will help ascertain the impact of GST on residential real estate, commercial real estate, rental housing, and affordable housing.