How does GST actually impact your financial plan - Motilal Oswal
How does GST actually impact your financial plan - Motilal Oswal

How does GST actually impact your financial plan?

Prima facie, this question may appear to be quite out of place. GST is after all Goods and Services Tax. So what GST impact on investment is really possible? Remember, there will be a plethora of implications of GST both direct and indirect. You need to understand the difference that GST will make to your cost of financial planning. How does GST affect your cash flow; is a key question you need to address. The impact of GST on common man is not yet well documented, but that is surely something for you to apprehend. Let us look at 5 areas, where GST could have a sustained impact on your financial planning process; both directly and indirectly. In reality, GST impact on investment is much more profound than you can imagine..

GST and the impact on purchasing power of money..
One of the key parameters that you consider when you plan your finances for the long term is the rate of inflation. Inflation actually reduces your purchasing power and therefore impacts your financial plan in two ways. Firstly, higher inflation is normally synonymous with higher returns on equities and you need to tweak your portfolio mix accordingly. Secondly, higher inflation will mean that you need to take higher risk and plan greater allocations to meet your long term financial goals. How does GST impact your cash flow and how is it relevant to your financial plan? The GST Council has kept the GST rate at 0-5% range for most of the food items and that is likely to keep food inflation under check. In the last meeting of the GST Council, nearly 3/4th of the items in the peak 28% bracket were reclassified into the 18% bracket or lower. Notwithstanding short term inflation pressures, the long term impact of GST will be to reduce inflation. That is positive for your financial plan as you will be left with a greater surplus in real terms.

Cost of transacting in financial products will go up..
There is a clear increase in the indirect tax impost on equity and debt related transactions by nearly 300 basis points. The 15% service tax stands modified to 18% under the GST regime. That will sharply increase the cost of transacting in equities, mutual funds and in portfolio management schemes. However, this higher cost is likely to be compensated as the higher cost of transacting will be compensated by higher returns on equities. How is that possible? The GST is likely to increase GDP growth rate by 150-200 bps each year. This will be value accretive for equities.

In your financial plan, there is a clear case in favour of equities..
Over the last few years we have seen a distinct shift away from debt and towards equities. That trend could get more pronounced now. Here is why! Let us understand GST impact on investments. Equity becomes more attractive as an asset class as the GDP push is likely to be value accretive for equities. Additionally, the lower interest rates caused by lower inflation will be a boost for equity valuations as future cash flows will get discounted at a lower cost of capital. At the same time, debt instruments will see interest rates going down as inflation weakens. That means, fixed debt instruments may make less sense from a long term returns perspective.

GST could trigger a greater shift towards financial assets..
While the trend from debt to equity is quite obvious, there is also a trend away from real assets like equity and gold in favour of financial assets like equity and mutual funds. Real estate investments have been largely constrained due to the combination of GST, demonetization and RERA. The prospects of putting shadow money in real estate is gradually diminishing. The higher impact of GST is likely to be visible on gold too. Also, the attractiveness of moving in and out of gold through your neighbourhood jeweller will reduce as more of these small jewellers are pushed towards the organized segment. The boost to equities and mutual funds may only get accentuated due to GST.

Tweak your budget and get more bangs for the buck..
We started off with a question on the impact of GST on common man. One big impact will be on the household budgets of families. Why is it so? The GST, by definition has been more lenient towards items of mass consumption while it has kept the pressure on more exclusive products. Thus GST offers you an opportunity to tweak your expenditure pattern in such a way as to make a substantial difference to your household budget. You can now look at your savings as a target and design your expenses as a residual number. The sympathetic approach of the GST towards items of mass consumption will be a boost for your savings power.

So, how does GST affect your cash flow? The answer is that it gives you the opportunity to tweak your budget more in favour of savings and allocate a greater portion of your savings into financial assets. What is the GST impact on investment? Clearly, the GST is favouring equities and mutual funds over debt and is also favouring financial assets over real assets. From the perspective of your financial plan, this could have important long term implications.
 

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