India’s new tax will change the country’s investment landscape

After more than a decade in planning, the Goods and Services Tax (GST) only just made its 1 July deadline. However, the first impressions following its implementation have largely been positive.

This is the third key step of prime minister Modi’s mandate leading into the 2014 election campaign. A tax amnesty that ended in September 2016 was quickly followed by demonetisation in November. GST, like the amnesty and demonetisation, will curb corruption, increase tax revenues and drag informal businesses into the formal economy. The size of India’s informal marketplace is estimated to be between half of and equal to the formal market.

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.

GST winners and losers

It would be simple to assume that 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 instantly dragging those skirting the rules quickly into line, or forcing their closure.

But while that might be the case for some parts of the market, it is not accurate across all sectors. We identify the sub-sectors where there is little room for the unorganised players to exist, and invest in those formal companies that should reap the greatest rewards.

-India model portfolio for growing income with medium risk

The uncontrolled participants have a number of advantages over those in the formal sector, including the acquisition of untaxed goods and undisclosed profits in passing on those goods. The primary reason for an unorganised entity to move into the organised space is to collect the available tax credits which may outweigh the advantages of remaining in the shadows.

Winner – Logistics

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.

We hold two of the country’s leading providers - Navkar Corp and Gateway Distriparks.  These two companies are expanding their operational capacity and making sensible acquisitions to ensure future success.  

Gateway Distriparks also owns 40 per cent of cold storage operator Snowman Logistics, part of a subsector that will grow in significance in the coming years with close links to India’s urbanisation trend.

Loser - Tobacco

The tobacco sector is one area that 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.

The future

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.

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 to attain similar levels of growth to China in the 1990s and early 2000s, ably supported by a strong reformist government and a solid central bank. 

Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment