India's upper house has finally passed the much-awaited Goods and Services Tax bill. According to some economists, implementation of the GST could add at least 2% to the country’s GDP.
Implementing GST was a central promise of the Narendra Modi government, and is deemed a milestone for India’s tax regime reform.
The move aims to create a single market for goods and services within the country, replacing the current system of goods being taxed in each state. For companies providing goods and services, the move also means far less bureaucratic delay.
Implementation is, however, some time away: India's states need to individually ratify the new GST bill and that will be quite a challenge.
Citywire Asia collated the views of leading investors on the impact this step will have on investing in the country.
Kenneth Akintewe, Aberdeen Asset Management
Senior investment manager, fixed income
The implementation of a nationwide Goods and Services Tax bill is a key test of reform progress.
The welcome news on GST comes in the wake of the national bankruptcy law announced in May, another major breakthrough. But beyond the short-term boost to sentiment, we will need to wait at least two to three years before any tangible benefits materialise.
When fully implemented the GST legislation will unify a number of indirect taxes into one levy, boosting efficiency.
Tax compliance is likely to improve resulting in a broadening of the tax base.
Further votes need to be carried out at both the federal and state levels. The infrastructure to enforce the tax needs to be set up, while crucial details – such as the GST rate, exemptions and dispute resolution mechanisms – still need to be hammered out.
This makes meeting the April 2017 implementation deadline very challenging. Depending on how GST is implemented, estimates that the levy could add 0.9-1.7 percentage points to economic growth may fall short.
Rahul Chadha, Mirae Asset Global Investments
The key benefits from the new Goods and Services Tax bill include the followings: “One India” – the most important benefit of GST is productivity improvement in the medium term.
Successful implementation of GST will take away the artificial tax advantage of goods produced within a state relative to those imported from other states.
Firms will now be able to benefit more from economies of scale without being held back by sub-scale factories and warehouses. All in all, GST will lead to market share gains for the organised sector with economies of scale, while the small-scale unorganized tax-evading sector gets marginalised.
A simpler taxation structure with less exemptions leads to greater tax compliance. According to the Finance Minister, GST can boost economic growth by as much as 2 percentage points.
From a sector perspective, GST will generally be positive for consumer goods sectors from lower taxes. On the other hand, the services sector will be negatively impacted by higher tax burden.
Anand Shah, BNP Paribas Investment PartnersChief Investment Officer, India
While many critical but smaller reforms had already been passed since Narendra Modi became prime minister in May 2014, the passage of the GST bill reinforces the credibility of the government’s ability to reform.
In the short term, we see the passage of the GST bill as a positive for investor sentiment, as it demonstrates the government’s ability to implement major reforms that will benefit India’s long-term growth.
The impact of the GST on companies will occur gradually as it is rolled out.
It is expected to benefit businesses linked to consumption thanks to more efficient warehousing and supply chain logistics, as it enables a more efficient use of heavy vehicle fleets; house building materials companies, thanks to lower duties; and industrial manufacturing companies.
Ashish Goyal, NN Investment Partners (Singapore)Head of emerging markets equity
We see the developments as positive. It demonstrates that the government can get legislation passed and this is an important milestone.
Although the actual impact is 2-3 years away, it is still very positive. Incremental structural growth in GDP will be about 0.75-1.5%.
There are a lot of unaccountable benefits including more importantly a reduction in black money.
Black money will go down and the formal economy will become bigger. Better tax collection is anticipated and this will impact across all sectors.
In terms of portfolio positioning – we were anticipating this and are overweight India.