On August 3, India’s Upper House passed the GST with a unanimous vote, but it still needs to be ratified by at least half of India’s states.
However, according to Rahul Chadha, co-chief investment officer at Mirae in Hong Kong, “the most crucial and difficult hurdle has been cleared. GST implementation is expected to take place starting April 2017.
“We see this as a landmark reform to unify India’s 1.3 billion people into one single market,” wrote Chadha in a research note.
“The GST will replace at least 17 state and central taxes, simplifying the current arcane tax structure with hundreds of exemptions and cascading tax-on-tax.”
The existing tax system created inefficiencies in manufacturing and logisitics, he said. Because the GST simplifies the tax code, productivity is expected to improve.
Productivity milestone
“India’s Achilles’ heel has always been supply-side bottlenecks due to various inefficiencies. The passage of the GST Bill is clearly an important milestone towards productivity improvement to realize India’s potential.”
A boost in consumer spending is also expected. According to local reports, The Federation of Indian Chambers of Commerce and Industry said consumers will benefit from a reduction in the overall tax burden on goods, which is currently estimated at 25-30 percent.
Aside from the consumer sector, companies in logistics, autos and cement are expected to benefit, Chadha said.
Wider benefits
Other benefits include greater tax compliance. The government has been losing a significant amount of tax revenue because of roughly 400 exemptions under the current tax regime between the state and federal level, according to Chadha.
“Together with other improvements we are witnessing on the ground, such as infrastructure rollout, financial inclusion, state electricity board reforms and bankruptcy code, India stands out as one of the best equity stories globally.”
He added that India’s finance minister believes the passage of the GST could boost GDP growth by up to 2 percentage points.
——————————————————————————————————
Mirae’s India Sector Leader Equity Fund vs the India equities sector and vs its benchmark, the MSCI India over the last three years. Will the GST provide further upside for India equities over the medium-long term?
