Finally, the wait is over and the Goods and Services Tax (GST) is arrived – a single comprehensive indirect tax, levied on goods and services, and aimed at replacing all other indirect taxes which launched on July 1st 2017. The GST rollout influenced first quarter earnings of India Inc., as organizations took some time to ally their production processes with the new framework, regulate the input tax credit system and acquire a handle on their working capital necessities.
Last year, demonetization of high-value currency notes interrupted markets and earnings because of its tremor value. GST can do the same, but at a minor gauge. Let’s examine how it influences the stock markets, as volatile change in stock market can create an economic disharmony and imbalance in the country.
The organized sector aligned their processes and information technology (IT) systems. As various establishments moved to clear their inventory at sheer reductions and manufacturing is stopped to avoid building up inventory, disruption was witnessed before the July 1 roll-out date. This led to a jump in sales at the cost of margins in the month of June, while a slackening in demand may ensue in the following months.
Another important element of GST is that the government has put in place laws that have a provision of anti-profiteering so that the benefits accrued are passed on in the value chain. The corporates are likely to retain the indirect benefits from savings in logistics costs. It remains to be seen how this would be implemented. The industry will closely monitor this from the pricing perspective.
Now, while one has to file only three service tax returns a year, after GST implementation, one will have to file four or five returns per state per month, which amounts to more than 100 returns per month. This will be faced by manufacturers having operations in multiple states as they will have to file multiple returns on a monthly basis. Thus, the industry needs to be ready with appropriate enterprise resource planning systems and processes that are GST-ready.
There has been strong displeasure in the general public, businesses, and firms from various countries that have implemented GST. In fact, some countries like France and the UK had to reduce their initial rates. The problems arising in India may not have a precedence as India is much larger and diverse than other countries where GST has been implemented.
Read: Deskera is GST Ready
When the landmark tax takes effect, an estimated 51 million smaller firms that currently do much of their business in cash will have to keep digital records, making it harder for them to under-report revenue. Asia’s oldest stock exchange, Bombay Stock Exchange (BSE) aspires to succor companies raise $100 billion annually from initial and secondary offerings of stocks and bonds, up from the present $30 billion a year. This will incite companies with good business models to grow at a faster pace, and tap the exchange to raise more funds for further expansion, forming a righteous cycle.
BSE is concentrating on cash equities after failing to gain market share in equity derivatives. BSE has a market share of about 15% for derivatives trading, compared with about 85% for the National Stock Exchange of India Ltd. The big teamster for the performance of BSE is yet the giant inflow of retail investors coming into the markets.
Although GST ensured a wider net of compliance in the longer run, the short-to-medium term pain has not been accounted, resulting in much higher tax collection. The markets have been enthusiastic about GST but the disruption it can cause has not yet been discounted. It could engulf market participants when we are in the middle of implementation. Lastly, when we evaluate the government’s track record on implementation, there has always been a gap between the gallant objective and its execution.