GST | A Reality
GST: A Reality
Refer our latest updates on GST
Beginning of a new era
One tax benefits max
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
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.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Sandeep Ashok Gupta
(S.Gupta@MotilalOswal.com); +91 22 3982 5544
(Somil.Shah@MotilalOswal.com); +91 22 33124975
3 July 2017
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