After a long wait, in one of its biggest indirect tax reforms, India finally implemented GST with effect from July 1, 2017. Like all big transformations, we believe GST will create disruption in the near term. However, in the long term, it is expected to (a) simplify and rationalize taxes, (b) shift trade from the unorganized to the organized segment, and (c) improve efficiency in the system. On the macro front, we believe this will be revenue accretive for the government, with the tax base expanding though tax rates on various products remain close to the current effective tax rates. While reported CPI is likely to remain stable, consumers might feel the pinch due to higher taxation on services. We believe big disruptions like GST also create opportunities in equity markets.
India’s biggest tax reform a reality now
- The indirect tax regime in India is being completely overhauled with the migration to GST with effect from July 1, 2017. We believe this would simplify and rationalize taxes, shift trade from the unorganized to the organized segment, and improve efficiency in the system.
- The real value of GST would be in the area of tax governance, where a system plagued with a plethora of discretionary, ad-hoc taxes would move toward a ruled-based, transparent and stable tax regime. This would make the tax system fairer by ensuring ‘neutrality’ across players, products or services, locations or business cycles.
Near-term pain for long-term gain
- Our channel checks suggest that while the larger corporates are well prepared for the change, SMEs and other trade participants are still grappling to understand its impacts and procedures. This is likely to create trade disruption in the economy in the near term.
- However, in the long term, this is likely to simplify taxation and provide ease of doing business in India. We believe that four key themes would emerge, which might have a significant impact on India Inc: (a) change in effective tax rates for various products and services, (b) availability of seamless input credit across the value chain, (c) shift of trade from currently unorganized segments to organized segments, and (d) rejig in supply chain management.
Revenue accretive for government; reported inflation unlikely to rise
- The GST rates for most products have been retained in the bands closest to the respective current effective rates and the tax on services has been hiked only slightly. Yet, we believe government revenues would increase over the medium term, with expansion in the tax base (since the exemption list will be pruned and threshold for levying tax reduced) and reduction in tax evasion.
- Over time, we expect the government to look at rationalizing taxes to further encourage the shift towards the organized segment.
- As far as the impact of GST on inflation is concerned, the GST rates will help reduce wholesale price index (WPI), while the impact on consumer price index (CPI) will be limited. However, since services constitute a larger share of the consumption basket than in CPI, Indian consumers are likely to feel the pinch of higher prices of services.
India Inc to be big beneficiary
- Our analysis highlights that sectors/companies likely to emerge as gainers are: (a) Consumer – Pidilite, Asian Paints, Century Plyboards; (b) Autos – Hero MotoCorp, Amara Raja Batteries, Exide Industries; (c) Multiplexes – PVR, Inox; (d) Media – Dish TV; (e) Retail – Shoppers Stop; and (f) Logistics – TCI, Gati.
- Sectors/companies likely to be adversely impacted: (a) Media: Print companies – HMVL, DB Corp, Jagran Prakashan, HT Media; (b) Autos – Ashok Leyland.
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