The Impact of GST on the Economy and Markets

GST Impact - Read on about how GST impacts the economy and markets in India

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Widely acknowledged as the biggest tax reform in the post-independent India, the goods and services tax (GST) was rolled out in the country from 1 July. The new tax structure has already generated a lot of expectations that it will bolster the Indian economy which will undergo a significant shift from the unorganised to the organised sector.

While the lower GST rates are likely to lead to a decline in inflation, economic growth is unlikely to improve significantly in the short term, though experts believe that both the government and India Inc. will benefit over the medium term.

Most economists and market analysts have forecast that inflation would come down because GST for most goods is fixed at a lower rate. The Indian companies will now have to reorganise their businesses as the new system will bring a higher number of smaller companies into the tax net.

But some short-term hiccups are likely to be seen over the next few quarters. Market experts say that employment generation could be a concern because the unorganised sector must shift towards the organised sector.

Let’s check out how GST impact affects various sectors of the economy.

FMCG

The Fast Moving Consumer Goods (FMCG) sector would benefit from the GST implementation because of the presence of the big organised market. GST for products like soaps, toothpaste, and hair oil has been lowered by 500-600 bps from the earlier rate. Established companies will benefit from the new tax system.

Pharmaceuticals and healthcare

Pharma products have to pay 12 percent GST instead of the earlier 10 percent. The companies will pass on the full impact to patients. The healthcare sector has been exempted from GST. The inputs by this area, however, have been taxed at 18 percent that will lead to a rise in the operational costs.

GST Impact on Airlines

Air travel in business class has become expensive after the implementation of GST. The tax rate has increased from nine percent to 12 percent. The GST on economy class travel has been set at 5 percent, lower than the previous 6 percent. Aviation fuel has been kept outside the GST ambit where the indirect tax system will continue. Aviation companies, as a result, will now have to pay two sets of taxes i.e. indirect tax and GST. The GST tax input credit will be available only on economy class travel. Air travel in low-cost carriers (LCCs) will become cheaper.

Broking and equity investments

The service tax has been subsumed in this sector, and the GST on financial services is 18 percent from the earlier 15 percent. On a one percent round brokerage, the overall cost because of subsuming the service tax would be three bps or 0.03 percent. Long-term investors need not worry much since the 0.03 percent shift won’t be too significant. But intraday and short term traders would have to change their economics to churn funds in equity markets. Whether this would actually have an impact on the liquidity and the trading volume, needs to be seen.

GST Impact on Cement

The GST impact is likely to be neutral on the cement industry. Cement, earlier, was taxed at 12.5 percent excise, while the VAT rates varied between 12.5 to 15.5 percent. Cement, under GST, is now taxed at 28 percent, almost the same as the earlier structure. The cement companies will also benefit from the reduced price of coal. Investors can keep an eye on cement stocks as the sector is expected to be unaffected from GST.

The implementation of GST would be disruptive as significant changes in the supply chain are in the offing. Most analysts believe the economy to grow to 7.4 percent in 2017-18, which is higher than 7.1 percent of 2016-17 but lower than 7.9 percent of 2015-16.

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