Will the introduction of GST lead to inflation? How will GST impact Stock Market? The introduction of the landmark goods and services tax (GST) on July 1st heralds a new era in India’s economic growth. However, the run-up to the final passage of the bill has been plagued with speculation, leaving corporate India to brace itself for the immediate impact across sectors and markets. While the finance minister has tried to allay fears of major disruption from the rollout, analysts expect some short-term volatility in economic indicators until manufacturers and service providers come to grips with the changes.
Will the introduction of GST lead to inflation?
There’s no clear answer to this, and observers are divided on which sectors, if any, could be hit by inflation after GST is implemented.
Revenue Secretary Hasmukh Adhia has suggested the standard tax rate for services may rise from the current 15% to 18%. This could increase retail inflation in the short term, although analysts say this may be offset by a lower tax on consumer staples and other goods.
Essential services such as healthcare, education, and agriculture will remain exempt from service tax under GST.
The GST Council has decided on four slabs for goods (5%, 12%, 18% and 28%), but it has yet to formalize rates for every category. The finance ministry, though, has indicated food staples will remain outside the bounds of GST.
Without knowing how individual goods within categories will be taxed – and therefore, whether or not to pass the cost onto consumers – it’s difficult to gauge the effect on prices.
Insiders have hypothesized the impact on some items: a rate of 22% or more on certain FMCG products could lead to inflation, whereas a rate of 18% would help the sector grow. If soft drinks are clubbed together with other demerit goods, subject to the maximum 28% “sin tax,” that could cause a price jump.
According to EY and Nomura, the elimination of cascading ( a tax that is incurred at every step of production and distribution, also known as “double taxation” or “tax on tax”) through GST will likely reduce inflationary pressures in the economy and spur productivity. Image courtsey BloombergQuint om what things might become costly.
GST Things that may become costly
I’ve invested in stocks of varying market caps across sectors. Will share prices go up or down due to GST?
In the run-up to the passing of required legislation, stock markets have moved in tandem with GST news, reacting to perceived delays or positive developments.
Replacing overlapping state, Central and cross-border taxes with a simplified system will make it easier to do business, and this prospect has also buoyed investor sentiment.
However, as individual industries will be taxed differently under the new framework, companies’ share prices may see short-term fluctuation depending on their sector.
Shares in some of India’s main cigarette companies rose when the government kept the tax slab for tobacco and tobacco products in line with expectations.
The logistics, pharma, consumer durables and FMCG sectors are all expected to gain from an improved supply chain due to reduced transport costs once GST is in place.
Several blue-chip companies, still reaping market benefits from the shift toward organized business after demonetization, anticipate a similar transition away from unorganized players once GST is in place. All of these factor into market speculation.
The timing of GST implementation coincides with the onset of the monsoon. If weather patterns are unfavourable, this could serve as a double whammy for some industries and affect corporate earnings.
However, as GST is expected to boost the government’s indirect tax revenues in the long term, experts predict an overall positive impact on the GDP, and, as a result, the stock market.
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