The Goods and Services tax (GST) will become effective from July 1, 2017. Presented below is an analysis of the impact of GST on the economy, mutual funds, investments, real estate, and stock market.
Impact GST on the Economy
The GST will replace all current forms of indirect taxes. This will make certain goods and services cheaper, while others will become more expensive. Economic growth may not be significant enough in the short-term, but corporate India, consumers, and the government will benefit in the long term.
Reduction in costs of goods and services due to lower GST rates may lead to reduction in inflation. The unorganized sector and more companies will need to reorganize their business structures as they will fall under the umbrella of GST taxation.
A few salient points of GST’s effect on the economy are mentioned below:
- Companies will not be able to evade taxes after GST implementation. This will cause them to conduct business with vendors and suppliers only via invoices. Large companies with efficient network of the supply chain will gain savings in costs, while smaller companies will have to spend more to comply with the rules. Restructuring of corporate operations will also gradually result in a shift to organized trade from the unorganized sector.
- Even though anti-profiteering laws are included in the GST bill, its implementation is in doubt. Companies may or may not pass on the benefit of lower taxes to consumers. They may pass a minimal percentage of the tax benefits to consumers, but a big chunk of the tax savings in logistics, streamlining of businesses, and influx of input credits will probably be diverted to higher profits and investments in new capacities.
- The effect of GST on economic growth is still being analyzed. Experts think that GST may inhibit growth in the short term period as big companies stress on reorganization and streamlining of the varied business processes, while smaller firms may experience loss of revenue. The impact of GST on economic growth may be positive only in the medium or long term; as per economists it may grow at around 7.5 percent. Experts also believe that enhanced investor sentiment, easement in doing business, and increased foreign investment due to GST will help boost economic growth in the coming years.
- Different kinds of essential goods such as food grains, household equipment, etc., and essential services like health, education, transportation, etc are either exempt from GST or it is very low. This may help reduced the inflation. It may however be noted that higher tax burden on companies due to more tax compliance will cause the firms to eventually pass it on to the consumers, as stated above, in the long run. Thus the effect of GST on inflation needs to have a wait-and-watch approach; experts believe that average inflation for 2017-18 is going to reduce and is estimated to be about 4 to 4.5%.
- The inflation may most likely reduce after GST. However, there may be no interest rate cuts by the Reserve Bank of India in June. RBI will most likely check the progress of the rainy season and the impact of GST before deciding on any kind of rate cuts.
Impact of GST on Investments
A few salient points of GST’s effect on investments are mentioned below:
- The different tax slabs will be eliminated via GST and changed into a flat tax rate. Companies in organized and unorganized sectors, big and small, will be on equal footing. The effect of flat GST rate on investment will be understood only in the coming years.
- The logistics industry will hugely benefit from removal of excise, octroi, and customs duty, etc. Experts believe that post July 1, investments in FMCG, battery, infrastructure, plywood, consumer durables, logistics, cement, wires and cables, and small-car and other automobile companies will yield good returns.
- GST will not have any impact on fixed deposits in banks, PPFs, and other low-risk secure investment instruments. Life and general insurance policy premiums will increase after implementation of GST. Fees, charges, etc. for varied banking services will also have a price rise.
- Free and open markets will induce increased investments, both local and foreign, which will then boost the economy. More access to different kinds of investment opportunities will increase the influx of players into the investment market. Any volatility in the markets can be overcome by remaining invested for long-term and keeping an eye out for market corrections.
Impact of GST on Stock Market, Car Prices, FMCG; etc
A few salient points of GST’s effect on the stock market are mentioned below:
- Service sector stocks: All services currently carry a 15 percent tax. It will be replaced by four GST tax slabs of 5, 12, 18, and 28 percent. Transport services will be taxed at 5% and hence SpiceJet, Indigo, and other economy aviation company stocks will probably benefit from GST. Telecom and financial services will have a tax hike to 18%, but it will be offset by available input credits.
- Fast Moving Consumer Goods/FMCG stocks: Milk, grains, and cereals are exempt from GST. Tax on mass consumption items like hair oil, soaps, toothpaste, etc., will reduce from 22/24 percent to 18%. Products like tea, sugar, edible oil, coffee, etc. will be taxed at 5% under GST. The FMCG sector will thus have huge tax savings and stocks of associated companies such as Nestle, Colgate, Dabur, and Marico, etc. will perform well.
- Stocks of automobile companies: Under GST, tax on cars will be 28% with 1 to 15 percent additional cess. Smaller cars will have a 1 to 3 percent cess, while it will be 15% for luxury cars. Tax on two-wheelers will be 28% without cess. Two-wheelers with above 350 CC engines will however attract a cess of 3%. Petrol and diesel automobiles will have a new cess, which may affect mid-segment vehicles, and prove advantageous for two-wheelers. GST will most likely not have any impact on automobile stocks.
- Multiplex and Cinema stocks: Service tax for movies is currently 15% with state entertainment tax ranging from 28 to 100 percent. GST will replace it with a flat 28% service tax. Going to cinema and multiplexes will thus be cheaper and associated stocks will do quite well.
- Stocks of cement, coal, and steel companies: Taxes on coal and metal ore will decrease under GST to 5%. However, GST will increase cement tax to 28 % from 24/25 percent. Stocks of JSW and Tata Steel will benefit. Stocks of steel and power companies with high coal dependence will also perform well due to reduced taxes. Gold will carry a 3% tax, which will benefit the industry.
- Stocks of capital goods and consumer durables: Capital goods and industrial intermediaries are currently taxed at 28%. It will reduce to 18% after GST. Fans, air-conditions, cables, transformers, and refrigerators carry the maximum GST tax of 28%. Effective tax on certain consumer durables may increase and this may cause associated companies to increase prices to balance higher cost and tax. GST will bring more companies into the organized sector, thereby decreasing unequal competition from unorganized market traders. This will benefit companies like Voltas, Crompton, Havells, etc., whose stocks will perform well after implementation of GST.
Impact of GST on Mutual Funds
A few salient points of GST’s effect on mutual funds are mentioned below:
- GST may adversely impact mutual funds, but this effect will be minimal. The TER or total expense ratio for mutual fund investments may increase. However, this does not mean that investors have to alter their investment strategies or plans.
- GST will result in an increase in mutual fund service tax from 15% to 18%, leading to slight increase in the price of mutual funds. The returns may also decrease due to the associated rise in expense ratio.
- GST is exempt on distributors with earnings of less than INR 20 lakhs per year. Expenses charged by AMCs/ asset management companies are also capped under the laws of GST. Thus, there may be a rise of three to four basis points in mutual fund investment charges.
Impact of GST on Real Estate
A few salient points of GST’s effect on real estate are mentioned below:
- The real estate industry is associated with transactions of high value. Thus, even slight increase in tax can substantially increase the costs. GST includes a 12% work contracts tax and taxes on most construction items range from 18 to 28 percent. These can however be balanced via input tax credits. Hence, GST will have almost nil effect on the real estate sector with regards to associated costs.
- The above neutral outcome will mostly be dependent on proper implementation of the new tax regime as well as a proper system of claiming tax credits. Currently, an under construction property or a property being constructed by a builder hired by a customer, carries a service tax on construction cost which is approximately 30% of the property’s total value. The GST does not provide clarification on the continuance/removal of this tax system. The impact of GST on commercial and residential real estate and affordable and rental housing can only be gauged after better clarity is provided by the government on abatement regulations, input tax credits, and other related aspects.