"...emerging markets will grow faster than the
developed world for decades to come."

Gideon Rachman, The Financial Times

GST Reform to Boost India’s Growth

GST Reform to Boost India’s Growth

Just when investors thought India could not grow any faster, its new Goods and Services Tax (GST) is projected to help boost the world’s fastest-growing major economy by as much as 2 percent, according to the country’s Finance Minister Arun Jaitley.[i]

Deemed the “mother of all economic reforms in India so far” by KPMG’s India Sachin Menon, the new tax which has been over a decade in the making, promises to integrate India’s web of local and national levies into a single payment, thus unifying the country’s 29 states and 1.3 billion people into a common market for the first time.[ii]

The GST bill passed in the Upper House on August 3, 2016 with an overwhelming 197 members voting in favour, out of a total of 250. Approval on additional details of the bill is currently pending with members of the Lower House. Given the strong support received in the Upper House and that the bill was initially approved by the Lower House, it is highly likely that this landmark reform will go through.

The Indian government is aiming to roll out the GST bill by April 1, 2017, with full implementation expected by fiscal year 2018-19. The bill will create a uniform tax system across all of India, benefiting local companies and vendors, as well as consumers, while also signaling to foreign investors that India is serious about implementing market-friendly policies that will make it easier to conduct business within its borders.

Key features of the new GST law

For local companies, cost savings in the transportation and storing of goods are expected to be the main benefits of the new GST bill. Additionally:

  • The tax rate on goods will be slashed from 25-30 percent to around 18 percent[iii]
  • Taxes will be paid at the point of purchase, not at state borders
  • Long line-ups that are regularly seen at border checkpoints, will be reduced
  • Thousands of small company warehouses will be replaced by a few zonal hubs

A World Bank report showed that Indian companies can save up to 40 percent in logistics costs that they previously incurred at checkpoints and toll plazas.[iv]

The long-term macro impact and importance to investors

India is undoubtedly one of the most compelling growth stories for investors today. With the economy currently expanding at a rate of 7.6 percent[v], investors simply cannot find this kind growth anywhere else. The new reform will help to take India’s growth rate to a new level in several ways, benefitting investors in India.

By creating one tax at the point of purchase, the GST will significantly expand the tax base, increasing government revenue. This additional income will flow back into the economy via spending on infrastructure and social programs. Infrastructure spending is one of the biggest drivers of growth in India.

The GST will also benefit consumers who are also a crucial part of the India growth story, as consumption accounts for close to 70 percent of GDP. The biggest advantage for Indian consumers is a reduction in the overall tax burden on goods. This will result in more money in the pockets of Indians to purchase consumer products.

As well, the passing of the GST law will entice international investors to ramp up their operations in the country, going hand-in-hand with the current administration’s ‘Make in India’ initiative. By subsuming all previous taxes, the GST bill is removing a deterrent of the ‘Make in India’ initiative.

Lastly, the new tax reform will ease fiscal management for the government. Taxes will be difficult to evade under the new system, as they will be self-enforcing and self-collecting, similar to the Harmonized Sales Tax (HST) in Canada.

Investors should see the implementation of the GST as a historic achievement, especially in a multiparty democracy such as India. Overall, it is a major win for the Narendra Modi government and a positive for the economy, boosting long-term growth, which is what investors in India are ultimately looking for. The passage of the GST bill demonstrates progress in what is already one of the shining lights in the emerging markets.

Sources

[i] Bloomberg Business, What’s The Big Deal About India’s Goods and Services Tax? Q&A, August 2, 2016

[ii] In a Victory for Modi, India Overhauls Its Tangled Tax System, New York Times, August 3, 2016

[iii] Zee News, How GST will benefit Indian economy, July 18, 2016

[iv] World Bank data, accessed on July 19, 2016

[v] Trading Economics data, accessed on July 28, 2016. Fiscal year 2015-16

 

 

Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.


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  1. Avi
    Avi 10 August, 2016, 16:09

    Woh, that’s interesting

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