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Who Wins, Who Loses From India's New Tax Regime?

Tom Burroughes, Group Editor , 17 August 2017


An emerging markets specialist investment house casts an eye on the winners and losers in the Indian economy from a new tax system that recently kicked in.

India has brought in a sweeping change to its revenue-raising system throught what is called its Goods and Services Tax, or more snappily, GST., a regime that will create winners and losers across this emerging market economy, a fund management house argues.

There are four tax brackets of 5 per cent, 12 per cent, 18 per cent, and 28 per cent. Foodstuffs such as grains, cereals and milk are exempt. The other brackets apply to a range of foods, goods and services; other exempted areas, meanwhile, include education, healthcare and residential accomodation. The new structure, which came into force at the start of July, is designed to replace a confusing pattern of rates with a more logical order and so it is hoped, foster economic growth while protecting vulnerable groups. The reform can be seen as part of a number of changes, such as India's move against high-value banknotes (ostensibly to crack down on fraud and improve tax collection). This is another part of a set of reforms being brought in by India's prime minister Narendra Modi, elected in 2014.

"GST is certainly something that can incrementally change the investment landscape of India for the forthcoming decades. The new tax will drive better efficiencies across industries in India to promote domestic investment and more critically, bring foreign capital back into the country,"  Simon Finch, co-manager of the India Equity Opportunities Fund at Ashburton Investments, said in a note.

Finch said it would be "simple" to assume the greatest beneficiaries will be organised participants in sectors where the unorganised players are greater in size, number and market share. This depends on the new tax forcing the closure or instantly dragging those skirting the rules quickly into line.

There are pros and cons for firms to enter the "organised" versus the "unorganised" parts of the Indian economy; some companies can win tax credits by putting their affairs on a formal footing and filing tax returns, others may benefit from staying in "the shadows", as Finch said.

One sector that will benefit from GST is logistics, he said. "Logistics is one sector where formalisation should be quickly forthcoming. India has a significant infrastructure problem as those that have visited will have experienced first-hand. Modi has been aggressive in his plans for road and railway investment which means pan-Indian logistics operations will evolve out of that opportunity. Currently 95 per cent of logistics provision comes through the unorganised channels. However, tax credits are likely to promote formalisation of this sector, with those in the organised space better equipped to facilitate trading operations around the country," Finch continued.

Finch said his fund holds two of the country’s leading providers – Navkar Corp and Gateway Distriparks.

"These two companies are expanding operational capacity and making sensible acquisitions to ensure future success. Gateway Distriparks also owns 40 pere cent of cold storage operator Snowman Logistics, part of a sub-sector that will grow in significance in the coming years with close links to India’s urbanisation trend," he continued.

On the flipside, a loser from GST is tobacco. "The tobacco sector is one area we have continued to avoid with uncertainty around regulations, plus the delays in the announcement of the additional taxation on cigarettes. With a GST rate of 28 per cent, an additional levy was placed on cigarette sales, increasing cigarette prices by a further 16 per cent in some states. This is an example of government policy resulting in unwarranted price volatility so we choose to avoid this type of interference though our stock picks."

Another winner from the GST is the auto ancillary sector, Finch said.

"A positive start to the monsoon and the 7th Pay Commission should benefit rural worker pay, which should in turn boost entire supply chain. We invest in Endurance Technologies and Motherson Sumi Systems, two of India’s leading auto ancillary participants, which demonstrated a strong build-up towards the implementation of GST," he said.

"GST will be inherently positive for Indian trade in the years to come and is another stepping stone in Modi’s push to reduce corruption, while enhancing tax revenues and the fiscal strength of the country. Although we expect there to be some teething problems in the coming quarter or two, as consumers and businesses grapple with the administrative burden of this shift, the positives will far outweigh the negatives," he said.

"GDP growth will be lifted as the unorganised players move or are dragged into the formal economy, and India can push forward towards nominal GDP growth rates in the low double digits. India has the potential of attaining similar levels of growth to China in the late nineties and early two-thousands, ably supported by a strong reformist government and a solid central bank," Finch added.


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