Goods and Services Tax (GST) is one of the most anticipated tax reforms in India. The Parliament passed the Central GST Bill, 2017 (CGST Bill), Integrated GST Bill, 2017 (IGST Bill), Union Territory GST Bill, 2017 (UTGST Bill), and the GST (Compensation to the States) Bill 2017. The approval of these Bills marks a significant step in India’s plans to implement GST starting from July 1.
This reform is considered one of the most crucial economic changes on the government’s agenda, as it impacts various aspects of our lives.
Since GST affects the taxation of all Goods and Services, it’s important to understand how it will influence the stocks in your portfolio. GST is an indirect tax reform designed to eliminate tax barriers between states and create a unified market. While GST is primarily a tax reform, its impact will be felt across every area of business, including procurement, supply chain, IT, logistics, pricing, margins, and working capital. Many business decisions made under the current tax structure may no longer be relevant under the new GST system.
GST is fundamentally a consumption tax, applied at the point of final consumption. It operates on the Destination Principle, meaning it is levied where the actual consumption of goods and services occurs.
GST is charged on value-added goods and services at each stage of sale or purchase in the supply chain. The tax paid on the procurement of goods and services can be offset against the GST due on the sale of goods or services. Manufacturers, wholesalers, or retailers will pay the GST rate but can claim it back through the tax credit system.
However, as the final consumer in the supply chain, the end buyer will bear the burden of this tax. In this sense, GST functions like a final retail tax. GST will replace numerous indirect taxes and levies across the 29 states, unifying India into a single market.
The advantages of GST are significant, including reducing economic distortions, creating a unified tax market, broadening the tax base, and eliminating the cascading effect of taxes (tax on tax). The bill, which aims to streamline the indirect tax system, is expected to be a ‘game-changer’ for the country, with its implementation seen as a positive for long-term growth, according to analysts. Many positions have been built in anticipation that the passage of this bill will uplift the market.
Sectors like FMCG, automotive, cement, light electrical, multiplexes, retail, and logistics are expected to be among the primary beneficiaries of this monumental tax reform.
For manufacturing companies, GST will create a level playing field for both organized and unorganized sectors, optimizing costs related to the movement and warehousing of goods due to a uniform tax rate. This will likely have a positive impact on inflation, reduce tax avoidance, and foster economic growth.