The Goods and Services Tax (GST) which is expected to be implemented from April 2017, is generally regarded as a game changing reform. GST can make the indirect tax system very efficient and will benefit all stakeholders including manufacturers, sellers, the ultimate consumers and the tax collecting governments apart from giving a substantial boost to GDP growth. GST is a value added tax where tax is imposed only on the value added at each stage in the supply chain. It is levied at all points in the supply chain. Credit is paid for acquiring inputs used in making the supply. In India GST is defined as ‘tax on supply of goods or services other than alcohol for human consumption.’ In simple language, GST is a single tax on all goods and services in the entire economy.
The GST Council which will decide the rates is yet to finalise the rates: Three rates are likely: a concessional rate (likely to be 12 per cent), a standard rate (rumoured to be 18 per cent), and a luxury rate (likely to be 40 per cent). The standard rate will be applicable to around 70 per cent of goods and services. Alcohol for human consumption and petroleum products are presently proposed to be exempted from GST.
Impact on inflation
The impact on the consumer will depend on the standard rate. If the standard rate is 18 per cent, there won’t be any inflationary impact since the higher service tax rates (presently 14.5 per cent) will be compensated by the lower rates on consumer staples, durables, vehicles etc which are attracting 24 per cent and above presently. The prices of hand sets, FMCGs, automobiles, white goods, and cement are likely to decline. The costs of all services like telecom, travel, insurance etc will go up.
Impact on the market
The stock market has an uncanny ability to anticipate events and discount them. In the case of GST also, this game of “buy on rumours and sell on news” played out. Logistics stocks, major beneficiaries when GST rolls out, have corrected after the event. FMCG, consumer durables, automobiles and cement will be major beneficiaries if the standard rate is around 18 per cent. Therefore, further market reactions will happen when the standard rate is known. The market, in general, will substantially benefit in the long run when GDP growth rate and earnings pick up.
(The author is chief investment strategist, Geojit BNP Paribas)