CASH IN ON GST BENEFITS TO BIG FIRMS
GST is now a reality. I doubt if there are any direct winners or losers merely due to a lower or higher rate of effective taxation. There will be a transition period of 18 to 24 months till the dust settles. These are yet early days. Numbers will not tell us the story for some more time. The panic situation to clear inventory that was produced before June 30 seems to have been a blessing in disguise for many. Inventory has been cleared and cash freed. There will be some inventory losses as well as some inventory write offs. A cleansing, so as to say.
Gradually, as the dust settles, there will be good tidings for the organised sector. The entire GST system levels the playing field. This means that the unorganised sector will not have any price advantage. Advantages of scale will be a competitive advantage, as it ought to be. The largest companies will be the biggest winners. Further, companies in sectors that face competition from unorganised players will also gain. I can see textile industry regrouping. As will automobile ancillaries. The organised sector will insist on buying inputs only from registered players in order to get their GST credits. Logically, this means that the smaller players will be forced in to registration and paying GST.
In the initial phase, a lot of companies will be shy of passing on the full extent of the inputs credit as they deal with a new system. In about a year or so, as the system stabilises, there will be further competition based on this fact. So, in the short term, some consumer products could face some price hikes, but it will level-off over time. Consequently, we may see some consumer companies report a spike in short term earnings over the next couple of quarters, but it would level off.
One thing to remember is that a broad increase or decrease is universal and is unlikely to change the demand supply equation in an industry. For instance, an increase in the effective service tax rate from 14 to 18 per cent will not reduce the total services being provided. Similarly, a reduction in car prices is unlikely to dramatically increase the sale of automobiles.
The big question is whether GST would result in a better compliance and consequently a higher collection of expenditure taxes. My answer is yes. Firstly, the service tax hike is a huge boost to the collection. And the compliance net will spread wider. The key thing to see is whether there will be a spin off on the government finances. I would think that there would be a consolidation of our finances leading to lower deficit. Now, the government could share some of the spoils by way of lower income-tax rates.
Lower income-tax rates is something that ‘appears’ more tangible and real. Even if it gets taken away by higher taxes on expenditure, the human mind always reacts more positively to higher cash in hand. This illusion helps build confidence in the system and also the economy.
GST is probably the single biggest fiscal reform that India is seeing. Yes, we can always moan about the absence of a single rate and procedural issues, but after one year, the results will be on the ground for all. Just one factor of Octroi being abolished helps boost our economy, as goods move faster and efficiency improves.
Let us not look at GST in isolation. Demonetisation was also an important step in the whole process. This administration is extremely focused on data integration. Demonetisation, Aadhaar, and GST are all pieces of a jigsaw which will complete the data integration. As every transaction becomes traceable and linkable, tax compliances would improve. Ultimately good compliance would help in lowering the effective tax rates. How the administration redistributes the gains is something that only time will tell.
Over the next two years, I can see corporate India becoming big beneficiaries of the GST system. Market leaders stand to benefit as scale becomes an important component. Compliance costs are unlikely to be high on a recurring basis, though there would be high transition costs. However, transition costs are unlikely to break the backs of any of the companies.
As an investor, I think that we are headed for good times. Focus on quality, size and potential. Overall, one can expect better efficiency of capital.