Modi’s Reform Agenda Gets a Big Push:
India’s upper house of parliament, the Rajya Sabha approved on August 3, 2016 the constitutional amendment bill for the Goods and Services Tax.The passage of the bill after more than 18 months of tough negotiations reinforces Prime Minister Modi led NDA governments commitment to reforms, particularly given the fact that the NDA is in a minority in the upper house. The bill was passed in the lower house of the Parliament, the Lok Sabha (where the NDA enjoys a majority) in 2015.
GST the Single Biggest Tax Reform:
The bill paves the way for implementation of the country’s single biggest tax reform measure first considered about 30 years ago. Once rolled out, it will be driven by the principle of one nation, one tax, doing away with multiple indirect taxes and economically unifying India by transforming it into a single market and a free trade economic zone for producers based inside the country.
GST is a destination based tax that subsumes (Exhibit 1) various indirect taxes at the central and the state level including excise duty, service tax, value-added-tax, octroi, entertainment tax, luxury tax and other local taxes. GST is designed to remove the cascading impact of taxes (by making available input credit across the value chain), introducing uniform tax rates across states, simplifying tax administration by having minimal tax slabs and broadening the tax base.
Exhibit 1: Taxes to be subsumed
|
Centre Level |
State Level |
| Central Excise Duty | State Value Added Tax |
| Additional Excise Duty | Entertainment Tax |
| Central Sales Tax | Octroi and Entry Tax |
| Service Tax | Purchase Tax |
| Countervailing Customs Duty (CVD) | Luxury Tax |
| Special Additional Duty of Customs | Taxes on Lottery, Betting and Gambling |
| Central Surcharges and Cesses | State Surcharges and Cesses |
Source: Antique
Coverage of GST:
GST will cover all goods and services, except alcohol. Currently there will be no GST levy on petroleum products till a date is notified on the recommendation of the GST council. Real Estate and Electricity may also remain out of the purview of GST.
Way Forward:
Passage of the GST as per Hasmukh Adhia, India’s Revenue Secretary is “the end of a beginning”. The bill will need to be passed by the Lok Sabha again, ratified by 50% of the States and notified by the President of India. Subsequently, a GST council has to be formed comprising the Union finance minister and state finance ministers to decide on the key operational details like rates, inclusion, exclusion, etc.
Deciding the tax rate is the next big challenge. The states are looking for a higher rate as compared to the Arvind Subramanian (Chief Economic Advisor of India) committee proposed rate of 17-19% (presently State taxes are at 26-28%) whereas, Congress the main opposition party with a majority in the upper house is pushing for a cap of 18%, considering its impact on everyone.
Thereafter, the central GST law and integrated GST law will have to be voted upon by the Parliament, probably in the winter session (Nov-Dec), and a state GST law will have to be voted upon by the State assemblies. These three laws will spell out the fine print of how GST will be implemented in India.
Concurrently, the government will also have to get its infrastructure and technology network ready for rollout of the GST. The migration of tax payers registered with central tax agencies to the GST platform is expected to be completed by October 2016 and the migration of State tax payers is expected to be completed by February 2017. If these are achieved within the specified time, the chances of roll out in April 2017 appears realistic. A three to six-month delay in implementation though is possible. Corporate India’s readiness will also be a pre-requisite for the smooth rollout of GST.
Our View:
The roll out of GST will benefit the economy, Indian corporates, the consumer and the Indian equity market. A National Council of Applied Economic Research (NCEAR) study suggests that GST could boost India’s GDP growth by 0.9-1.7 per cent.
Dual monitoring and real time matching of each supplier and purchaser will reduce tax evasion. Withdrawal of various exemptions, presently offered on Central and State government taxes will reduce the annual tax revenue loss to the exchequer of upto ~AU$66 bn. The additional tax revenue will improve India’s tax to GDP ratio and fiscal health significantly.
A uniform tax across the country will improve the ease of doing business in India. Competitiveness of manufacturers will increase (providing a boost to the Make in India program) as the cascading effect of taxes will be eliminated and input tax credit will be available across the value chain. Further, lower tax rates will also lead to volume gains. India will be a single market where companies will be able to move and sell their products freely (earlier this was a logistical nightmare) across states, increasing the overall activity in the economy. A study had shown that border checks, result in Indian trucks driving 280 kms per day, which is only 35% of the 800 km that a truck travels in the US. The dismantling of border checks (intra and inter-state) will remove one of the main sources of corruption in the movement of goods. The increase in average distance covered in a day, the reduction in corruption and the doing away of the requirement of multiple warehouses / depots will bring down the logistics cost in India significantly. Currently logistics costs in India are 3 to 4 times the international benchmarks.
For consumers, most products are likely to be less expensive over a period of time. However, most services including restaurant bills, mobile bills, travel, insurance premiums, etc., will become more expensive.
The rollout of GST will be a very positive development from an equity market perspective. The market will view the development as the ability of Prime Minister Modi led NDA government to push forward important reforms. Whilst the market had to a large extent priced in the anticipation of the passage of the GST Bill, a timely implementation of GST could spike a further rally. However incremental gains in equity markets will be a function of corporate earnings growth which over the long run will benefit from a streamlined taxation system, like the GST.
Sectoral Impact:
A few sectors that are likely to emerge as GST rollout gainers are:
|
Sector |
Current |
GST Impact |
| Consumers | Excise Duty 0-12%; VAT 12.5-14.5%; Entry Tax 1% | GST rate of <=18% is positive to most companies; improving competitiveness from supply chain efficiency |
| Auto | Excise Duty 12-30%; VAT 14.5%; Central Sales tax 1% | Should benefit from a rate below the total tax of >27% |
| Construction Material | Excise Duty 12.5%; VAT 14%; Central Sales tax 1-2% | Should benefit from a rate below the total tax of >27% |
| Media | Service Tax – 15%
Entertainment Tax by States – 7% |
Should benefit from a rate below the total tax of >27% |
| Logistics | Organised logistics business is primarily export-import based | Reduction in inter-state barriers will increase inter-state commerce and hence the requirement for logistics support |
Source: ICICI Prudential Asset Management
Sectors likely to be adversely impacted
|
Sector |
Current |
GST Impact |
| Telecom
|
Service Tax 15% | Tax incidence will increase |
| Pharma | Excise Duty 4-8%; CST 2%; VAT 5%; Additional Customs Duty 4% | GST rate > 15% could be negative; Supply chain efficiency potential; No clarity on tax holidays |
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2005
The journey towards the “birth” of India Avenue originated in 2005, when ING Investment Management started a business in India as a separate division, utilising a practiced multi-manager philosophy in markets like Australia, and exported it to India. Three of our founders, Mugunthan Siva, Rajeev Thakkar and Sajjan Raut Desai worked together for INGIM (India), building investment strategies and structures, under this philosophy and applying them to Indian capital markets
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