GST: Investor patience will be tested

The goods and services tax (GST) narrative is likely to dominate mindspace for months. The switchover will inevitably be chaotic. One downside: government officers implementing and overseeing the system have great powers in practice given a brief to prevent profiteering, etc. Another downside: increased paperwork including multiple registrations at many points.

Both sets of tax rates for goods and services are confusing. These will surely require revision and simplification. There are many inconsistencies. For example, green cars are taxed at a higher rate than normal cars. Tourism could see a jolt. Hotels face higher taxes and there's no way for tourists to offset higher hotel rates. The horse breeding industry, which employs lakhs of people could die due to an increase on taxes on gambling. 

So, the short-term impact will be messy. What about the long-term impact? The GST should turn India into a single market, reducing frictions that make it hard to move goods across states. However, a complex tax regime with ambiguities may lead to officials extracting large “service charges” over and above official rates. This could lead to more friction in practice. 

Another imponderable is time: How long will it take for the new system to straighten out and start running smoothly? Comparing earnings numbers and ratios will be tough, while this is work-in-progress. If it's six months, investors must wait and watch for two quarters. 

Calculating the consequences of the impact of GST on industry value-chains could be hard. For example, electronics gets more expensive because duty on manufactured goods rises. This looks bad for telecom and information technology (IT). However, offsets for service costs can be availed, and that could lead to more domestic business for the struggling IT industry and more demand for value-added telecom services. Nobody can extrapolate this sort of thing with much confidence until the system is up and running. 

The GST will also obviously have a huge impact on macro-economic data. The FY18 Budget projections for revenue collections, and hence for the fiscal deficit, etc will have to be drastically reworked. If the new system takes too long to settle, collections may fall and subsidy programmes like MNREGA need cutbacks. That will affect rural consumption, for example. The Centre may go slow on recapitalisation of PSU banks with shattered balance sheets if it's short of revenue. On the other hand, if revenue buoyancy is good, there may be possible upsides.

Right now, securities analysts are groping for a clear picture on the new system because offsets and excise exemptions are hard to extrapolate. The randomness of tax rates is also reminiscent of the worst days of the License Raj where industrialists would lobby for breaks for their respective industries.

Tax rates are supposedly going to be down on soaps, toothpaste, hair oil, adhesives, coal, large cars, and SUVs. Of these, coal consumers (meaning the thermal power industry) have problems galore so they’ll be grateful for falling prices, assuming tax cuts are passed on. The demand for large cars and SUVs could be spurred by respective reductions of 12 per cent and 6 per cent in tax rates. 

The rates are reckoned to be neutral on cigarettes, cement, white goods, small cars, two-wheelers, and tractors. Paints, skin creams, shampoos, electrical switches, and three-wheelers will suffer higher imposts. Presumably, analysts will examine the portfolios of FMCGs which are manufacturing many such items like skin creams, shampoos, soaps and toothpaste and figure out the net tax-impact. If it works as envisaged, GST should eventually make the taxation process less painful, widen the tax base and reduce the daily frictions of doing business across India. Investors have already bet heavily on the industries expected to see gains. There could be a long period of adjustment as the