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.
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.
Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it 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. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.