Any changes in the policies change the economic conditions of a nation & that change the market sentiments towards companies & that drive the stock price up/down.
Same applies to recent Goods and Service Tax (GST) Bill.
Before we have some peek of how the stock market will be affected by this bill, we need to understand what? how? why? where? of GST Bill.
Hey! don’t skip this part. It will lay down a base to understand why and how the stock market will get affected by this dynamic bill.
What is Goods and Service Tax (GST) Bill is all about?
It is an comprehensive indirect tax, levied on goods and services, aimed at replacing all other indirect taxes.
France was the first country to introduce this system in 1954. Today, it has spread to over 160 countries.
Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both federal and state or provincial governments.
In India, a dual GST is being proposed wherein a central goods and services tax (CGST) and a state goods and services tax (SGST) will be levied on the taxable value of a transaction.
Currently, there are many indirect taxes in Indian economy like Value Added Tax (VAT), Service Tax, Excise Duty, Octroi etc which is collected by municipal, state & central government.
But after the execution of GST Bill, there will be only one indirect tax levied on all goods and services possibly at the flat rate of 18% which will be collected by central government (on behalf of both, state and central government).
Direct taxes on Income etc will stay unaffected.
What are the benefits of GST bill?
There are many benefits associated with GST bill which will boost the economy to great extent.
- It will simplify the tax process.
- It will curb black money and corruption.
- It will improve tax governance.
- It will unify India as a single and united market place.
- It will bring in sea change in transportation of goods like the number of days will come down, the cost of carry and octroi duty will get reduced. We can expect 5 to 7 percentage gain.
- It will ease the process of paperwork.
- It will create a efficiency in trade.
- It will ease the process of logistics and will create a faster delivery environment.
- It will simply the study material of taxation in CA (heck, I was frustrated with all the chapters of indirect taxes in CA).
These are some major benefits of execution of GST bill.
What are some disadvantages of GST bill?
Everything have 2 sides, same applies with GST. It will affect some sector in negative way.
- Some state may lose some tax benefits.
- Service sector may get affected as service tax will get hiked to 18% from current 14.5%.
- Execution of GST all over India will a cumbersome.
Why does government want to pass GST bill?
Implementing GST bill will hike the taxes on service sectors and this will increase the tax revenue of government.
Service sector is increasing in India at a high increasing rate. As per the survey, in India, the growth of services-sector GDP has been higher than that of overall GDP between the period FY2001- FY2014.
Service sector tax increases ad this sector is also increasing. Tax revenue.
It will also curb corruption and black money. It will restore the huge purchasing power in the hands of the consumer, thus self-propelling the economy into a spending and investing cycle.
It will attract huge domestic and foreign funds will flood the Indian market so high cash reserve in government treasury.
It will also improve the tax-to-GDP ratio by around 1.5 per cent.
What ever the benefits exist but still there are many challenges in India to pass the bill. It have been in talk since a long time and is likely to get passed in this monsoon session of parliament.
Also, there are many benefits that central government is working to make India a better place like curbing black money, corruption etc.
How will GST bill affect the stock market?
The implementation of GST is expected to reduce the cost of logistics. This includes costs of transportation as Octroi tax will not be levied separately.
The implementation of the GST is expected to simplify the tax structure and make the supply chain more efficient. This would narrow the cost differentials between organized and unorganized sector. The organized sector would be in a better position to compete with the unorganized sector on prices.
“It may not lead to an immediate impact on markets, there cannot be an argument about the fact that GST is a big and much-needed structural reform. If passed, this will be a step in the right direction” quoted by Pankaj Sharma, Head of Equities, Equirus Securities.
This could shift demand to companies in the organized sector from unorganized players.
Hence companies like Finolex Cables, Havells etc that compete with the unorganized sector in products like cables, wires could stand to gain.
Some direct benefits are as follows:
- It will act as a boon for the company and business which often deals with multi-level tax levitation.
- It will boost the company related to logistics which mainly deals with export and import due to ease in the process of faster delivery. Also, ease of paperwork.
- It is going to make our tax administration a lot more efficient because you are ultimately collapsing manufacturing taxes through excise duty and service taxes as well as states VATs into a single tax, which obviously brings a lot of efficiencies that can add between 100 bps and 200 bps to GDP in the long run.
- The sectors to benefit the most would be logistics, E-commerce, automobile, and FMCG among others.
Overall, the following stock will benefit the most if the bill passed in this monsoon sessions.
- Allcargo Logistics
- Finolex Cables
- Century Plyboards
- VRL Logistics
- Britannia Industries
- Century Plyboards
- Inox Leisure
- Bata India
- Relaxo Footwear
- Amara Raja Batteries
- Balmer Lawrie
- Pincon spirit
- Dish TV
- Exide Industries
These are some well-known companies which will directly get affected positively by GST bill (some had already face their saturation level) and still there are many indirect benefits of the bill for other companies.
GST will act as a catalyst for market uptrend but it can get capped on the sentiments of hike in federal interest rate in coming months.
Following is the 10 highlights outsourced from ndtv.com:
- The rate and scope of the long-delayed tax have been agreed upon today by the powerful GST Council, which consists of Mr. Jaitley and his counterparts from different states.
- The four GST slabs have been set at 5%, 12%, 18% and 28% for different items or services. The brackets are steeper than the rates of 6, 12, 18 and 26% earlier proposed by the government.
- To keep inflation in check, essential items including food, which at present constitute roughly half of the consumer inflation basket, will be taxed at a zero rate. The lowest rate of 5 per cent would apply to common use items.
- The peak rate of 28% will apply to luxury goods. Luxury cars, tobacco products, and aerated drinks will attract an additional cess on top of the highest tax rate.
- The additional cess and a clean energy cess will create a revenue pool which will be used to compensate states for any loss of revenue during the first five years of the implementation of GST, Mr. Jaitley said.
- The Finance Minister pointed out that the average is lower than the 18% demanded by the opposition, in particular by the Congress.
- Service Tax will go up from 15% to 18 %, said Revenue Secretary Hasmukh Adhia.
- The tax rate agreed upon today must be now be approved by parliament, which meets from November 16 for the winter session. Parliament has to pass two bills related to GST in the winter session to be on track to roll out of the new indirect tax regime from April 1 next year.
- Fitment or categorization of items for each slab will be done by officials and will then be approved by the GST council, Mr. Jaitley said.
- GST does away with indirect levies charged when goods cross state lines and unify India into a single market.
You can get the full list of 172 items with respective tax slab information in this PDF file.