Is India a buy after 'biggest tax reform since independence'?

Andrew Cummings
August 9, 2016

If 18% is the GST rate, then the provincial governments and the Central government will get 9% each.

Various industries, including the real estate sector, homebuyers and consumers are set to gain as once implemented GST will replace the now applicable multiple taxes such as value added tax (VAT), custom duties, central sales tax (CST), excise duty and service tax etc with a single tax and hence there will be visible reduction in the cost for all the industry players and so reduction in the prices of goods and services will surely take place and thus, an uptick in market demand across the industries is expected.

Its passage marks a victory for Prime Minister Narendra Modi as he seeks to boost growth in Asia's third-largest economy, and is a relief for investors, especially overseas, who'd been growing impatient about the pace of reforms.

The GST law will create a single market comprising of a billion-plus consumers, do away with fiscal borders between states and bring about tax uniformity across the country.

Graphic by Anirban ghosh Sanjay Piplani and Tanmoy Chakraborty Click here to Enlarge
Graphic by Anirban ghosh Sanjay Piplani and Tanmoy Chakraborty Click here to Enlarge

Many companies with a nationwide presence would set up warehouses in different parts of the country to avoid paying multiple taxes. "The GST would have been more homebuyers" friendly if stamp duty had also been subsumed into it.

'Moreover, other countries that have introduced unified tax systems, such as Australia, Malaysia and Canada have experienced economic slowdowns before the benefits have arrived.

The government is confident of rolling out the GST regime from April 1 next year but the deadline may be hard to meet if resolution of issues like the rate of tax and items to be exempted take longer, Revenue Secretary Hasmukh Adhia said on Sunday. Income tax, which includes tax on company profits, is the exclusive domain of central government and is referred to as direct taxes.

Prices will mostly depend on the tax rate set later this year.

Mr. Rajesh Gupta, Director, Okaya Power Pvt.

Meanwhile, the GST Bill will be taken up by the Lok Sabha tomorrow, with virtually all political parties backing this legislation.

'So even if Modi achieves full implementation of the GST by April next year, it is unlikely to provide him with an economic fillip before the national election campaign cranks up in late 2018.

In the immediate-term, Nomura analysts warned the GST could negatively impact the economy as higher taxes hit consumption and push up inflation by 20-70 basis points in the first year of implementation. It also argued that fewer exemptions and evasions would eventually raise the tax collection and poor Indian provinces would benefit more. If the GST rate remains below the overall taxes we pay now, it will be beneficial, otherwise it may turn out as a real dampener, " said Mr. Naveen Goel, Director, Glint Faucets Inc. One sticking point could be whether the 28 states agree on a single rate of GST with a majority decision needed for it to be ratified.

It was then that Congress opposed the GST bill. "A lower GST rate will lower the manufacturing costs of the products and thus, the consumers will also be benefitted significantly", added Mr. Nitin Aggarwal, CEO, Prayag.

"We will have to fit services in the slab which is neither too high or low at the time of deciding the final rate structure", he said.

With the introduction of Goods and Services Tax, many taxation procedures will come down, almost halving the cost of inventory as customers will not need to pile up stocks in different warehouses, say experts.

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