New Indian tax a boon for EM investors
India’s Goods and Services Tax (GST) should remove a wide range of distortions and inefficiencies, benefiting investment, growth, and tax revenues in the medium to long run.
4 August 2016
After a decade of waiting, India has finally passed a bill clearing the way for the implementation of a unified Goods and Services Tax (GST). This may sound dry, but when one considers that until this point India has been less of a “single common market” than the European Union, the implications seem much more significant.
By unifying tax rates across goods and services, removing taxes on the movement of goods and shifting the basis of taxation to consumption rather than production, the GST should remove a wide range of distortions and inefficiencies, benefiting investment, growth, and tax revenues in the medium to long run.
Impact on inflation and growth
However, implementation could be messy; the GST will reduce taxes for manufacturers but increase them for service producers. This could have a potentially inflationary impact and result in a negative hit to growth in the short run if manufacturers do not pass this reduction on but service providers pass on their tax increase.
The passage of the legislation is positive for sentiment; investors had become somewhat jaded on the Indian reform story as Prime Minister Modi’s government became bogged down in the same mess of vested interests and political inertia that has plagued successive governments.
Policy outlook improved
That the Bharatiya Janata Party (BJP) can co-operate with the opposition Congress party to enact important legislation, and that it has built support in the upper house, improves the policy outlook and could encourage foreign direct investment and portfolio inflows.
Some caution is warranted though; the GST was in the interest of a range of parties in a way that other reform legislation may not be. Still, this provides a much needed fillip for India, emerging markets, and global investors seeking somewhere, anywhere, to invest.
- Emerging Markets
- Craig Botham
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us