Learn­ings From For­eign Bourses Post GST Im­ple­men­ta­tion

Dalal Street Investment Journal - - EXPERT SPEAK -

The key learn­ing from GST im­ple­men­ta­tion in other coun­tries strongly sug­gests that in­vestors in India should pre­pare them­selves for a cor­rec­tion in the short-term.

The new Goods and Ser­vice Tax (GST) regime in India is ap­pli­ca­ble from July 1, 2017. The un­cer­tainty in tran­si­tion to the new regime is mak­ing busi­ness­men, tax­men and com­pa­nies jit­tery. In­vestors and busi­nesses do not like un­cer­tain­ties in reg­u­la­tions, but changes are in­evitable and, sooner or later, is­sues set­tle down.

Since 2000, three coun­tries have im­ple­mented GST. These are Aus­tralia, Canada and Malaysia. These coun­tries would have faced sim­i­lar chal­lenges in im­ple­men­ta­tion, in­fla­tion, cash flow is­sues, stock out sit­u­a­tions, de­crease in growth rates, etc. India also has its own set of is­sues re­lat­ing to im­ple­men­ta­tion, such as lack of pre­pared­ness amongst traders, ex­ces­sive doc­u­men­ta­tion and lack of clar­ity. Traders from var­i­ous in­dus­tries like tex­tile, food­grains, spices, di­a­mond, dry fruit, etc. held a strike protest­ing against GST. On other hand, ex­porters of goods and ser­vices from India are also wor­ried about de­lays in tax credit im­pact­ing liq­uid­ity and in­creas­ing the cost of work­ing cap­i­tal funds. All these teething trou­bles are likely to have a short-term im­pact on per­for­mance of the In­dian stock mar­ket. Thus, in the present study, we are fo­cus­ing on mea­sur­ing the per­for­mance of stock indices of those coun­tries that have im­ple­mented GST. We have cal­cu­lated the quar­terly in­dex re­turns for bench­mark indices of each of these coun­tries pre- and post im­ple­men­ta­tion of GST. The find­ings would help us un­der­stand how In­dian stock mar­kets are likely to be­have af­ter GST im­ple­men­ta­tion.

Mar­kets are for­ward look­ing and a de­crease in sec­ond quar­ter (July-sept.) earn­ings due to glitches in GST im­ple­men­ta­tion are likely to re­sult in a de­crease in share prices, thus lead­ing to fall in indices. For this study, we have con­sid­ered S&P ASX 200 for Aus­tralia, S&P/TSX Com­pos­ite in­dex of Canada and FTSE Bursa for Malaysia. We ob­tained daily val­ues of these indices and cal­cu­lated quar­terly re­turns of these indices. In Ta­ble-1, we can clearly see that across all the three coun­tries, the stock mar­ket indices have gen­er­ated neg­a­tive re­turns in the quar­ter when GST was im­ple­mented. In the first quar­ter af­ter im­ple­men­ta­tion, Canada has re­cov­ered, whereas the Aus­tralian and

Malaysian mar­kets fell. Ab­nor­mal fall of -18% of the Cana­dian in­dex in Q -2 can be as­so­ci­ated more with the Lehman cri­sis where indices around the globe tum­bled.

The key learn­ing from GST im­ple­men­ta­tion in other coun­tries strongly sug­gests that in­vestors in India should pre­pare them­selves for a cor­rec­tion in the short-term. Re­tail in­vestors should avoid in­vest­ing for short term prof­its. In the longer term, re­lent­less ef­forts by GST com­mit­tee, Cen­tral Board of In­di­rect Taxes and Cus­toms (CBIC), pro­fes­sional bod­ies like ICAI and other in­di­rect tax ma­chin­ery are sure to reap re­sults. The long term growth story of India still looks promis­ing.

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