HOW GST WILL IMPACT OUR ECONOMY

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1. GST will reduce tax evasion

There is a very logical reason as to how GST will help in reducing tax evasion – All traders will insist on taking bills for all their purchases.

Let us understand this with an example. Suppose you are a mobile phone distributor. You are buying mobile phones from the manufacturer and selling to wholesaler.

This is the net position after introduction of GST.

As we can see, all the distributors will prefer to purchase with invoice, because it gives them a better profit margin.

This is because the distributor will get credit of all the taxes paid at the previous stage. In the present scenario, the distributor has to bear the burden of excise duty. Therefore, for him it makes more sense to simply avoid paying taxes.

However, after the introduction of GST, it will be more beneficial to purchase goods on invoice. Now, if the customer himself insists on taking the bill, we can assume that tax evasion will fall. This is the biggest advantage of GST.

To know more, read this –

1. Palkesh Asawa’s answer to How will the goods and sevices tax (GST) work in India? How is it any different than the value added tax (VAT)? 
This answer explains the working of GST in detail and exactly what it is changing in Indian economy.

2. How GST Will Change the Face of Indian Economy – NDTV 
This article describes the advantages of GST.

2. GST will give more money to under-developed states

Why is Gujarat a very developed state in India? Why can’t industries come up in backward states such as Bihar and Jharkhand?

The problem is – lack of infrastructure. Governments in Bihar cannot provide basic facilities such as electricity and water. This is because these states are not rich. Why are these states not rich? Because the tax collections are much less compared to other states.

Take a look at the tax collections of various states in India.

You can see that there is a big difference between states; and that tax collections are highest in manufacturing states.

GST will ensure that tax collections in other states also rise, because GST is a consumption based tax.

This is because, being a consumption based tax, tax collection will go to the states in which the goods are consumed, and not where they are manufactured. To understand this better, see – What is the difference between the current taxation and the new goods and services tax (GST) in India? What is the impact?

Now, where are the goods consumed? Typically speaking, more consumption will take place in states where the population is higher. As a result of this, the per capita tax collection in the economy, across various states will even out

This will be another advantage to the economy of the country, because more taxes will accrue to states that have need of money; which, in turn, will get developed.

To know more, read this –

1. Brief on Goods and Service Tax (GST)
This article talks about advantages of GST, and also explains why GST is a destination based tax, and how it is beneficial to the economy.

2. Taxing consumption 
This article talks about advantages of consumption based tax, by taking an example of Australian economy. A good read for those who are interested in knowing the intricacies of this system.

3. GST will remove location bias, thereby giving support to smaller businesses

Another big advantange in GST is that it will even out the tax structures of various states. This removes a location bias. Therefore, I can set up my factory in any state of the country, without having to worry about tax differences. In any ideal scenario, taxes should not be a hindrance to my investment decision. In India, this will go away once GST in introduced. This means that even undeveloped locations can see more businesses coming up.

A small retailer in Madhya Pradesh can transfer its goods to Uttar Pradesh and purchase its goods from Rajasthan. It can also take input services from a contractor located in Bihar and pay advertising charges to an agency in Karnataka – all this, without any significant worry about taxation. Why? Because tax structure in all these states will be the same!

In conclusion, we can say that GST is one tax that can be a major break through in the Indian taxation system.

Edit 1

Prajwal Subrahmanyan has very intelligently pointed out that there are chances of price increase for final consumers. This doubt arises because of my example in the first part. However, we cannot say this with certainty because of three reasons – (1) It depends on the rate of GST, which is likely to be revenue neutral rate; (2) There are a lot of other taxes, apart from VAT and Excise, therefore my example is not entirely correct and it is used only to show that incentive to raise invoice will increase; (3) The major reduction in tax evasion will be observed in the middle stages, not so much as the final stage. 
To understand this in detail, one can refer the comments section.


HOW WILL GST AFFECT THE VARIOUS SECTORS IN INDIA 


Okay, I am not an expert investor and my stock recommendations hardly work. If they worked, I would be quite richer than I am today. So please read this answer only for informative purposes and not as my recommendation.

  1. The FMCG sector (HUL, Colgate, P&G, Marico) will largely benefit under GST. This is on account of two factors:
    1. Distribution costs can come down since several warehouses may be closed since they are no longer necessary. This could mean a reduction in the costs of these companies.
    2. The tax rates are also largely a positive news for FMCG sector, since taxes on soaps and other cosmetics are in the 18% tax band, which is slightly lower than the current effective tax rates.
  2. Hospitality sector (five star hotel chains, for example) will suffer after GST since the taxes on luxury hotels and their associated restaurants are expected to go up. High taxes could affect the revenue of these hotels. See What effect will the implementation of GST have on the tourism industry?
  3. Power and mining/metalsindustries will also gain from GST. This is because the GST rate on coal is pegged at 5%, quite lower than the current rates. Also, rates on copper/aluminium/steel are marginally lower than the current effective rates. This would mean a positive news for stocks like Coal India, NTPC, Tata Steel, Hindalco, Vedanta etc. GMDC is another special beneficiary from GST as Swapnil Kabra noted in his commenton this answer.
  4. Pharma sector has rates split into 5%, 12% and 18% category depending on the type of drug. Life saving drugs are mostly under 5% rate band. I am not sure about how this affects the pharma sector, but news reports say that this was in line with the industry expectation (and hence, the analysts too) – which means there is likely to be no major movement here.
  5. Automobile industry will also stay neutral since most cars are taxed at 28%, which is broadly similar to their current levels. In fact, the rates are marginally lower, so if you expect any movement – it would be for the good overall. Watch out for auto stocks in this context.
  6. Electronics sector will suffer after GST since taxes on white goods including TV, refrigerators, air conditioners etc. are set to go up since most of these products are in the 28% tax slab. So, related stocks such as Whirlpool, Blue Star etc might see a fall in prices.
  7. Telecom stocks might see a drop since the rate of 18% is obviously higher than the current level of service tax. Telecom companies like Bharti and Idea are understandably upset about this.
  8. Housing sector has it’s own set of complications. Cement is taxed at the peak rate of 28%, so related stocks like Ultratech, ACC etc. might see a dip. Paints are also taxed at peak rate, so watch out for Asian Paints too. Construction (such as works contracts) will be taxed at 12%, also marginally higher than current levels (although transfer of input credits will be available). Overall, housing sector is neutral to worse after GST.
  9. Others – cigarettes are broadly at the same level, food items are mostly positive, banking sector might suffer marginally since the rates are higher.

Have I covered everything? I don’t know. Comment if you wanted to know about anything else as well.


Here is a word of caution, and some financial advice:

The above answer will help you in understanding how GST affects the respective companies. But will the share prices fall or rise? To know this, we would need to know whether these impacts have already been factored in their existing prices? If these impacts are already factored in, then speculating does not make sense.

Stock markets are effective investment options, but not when you are late and others have already applied their minds to it.

Palkesh Asawa  Chartered Accountant (India)

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