Impact of GST on Investments
The implementation of the goods and service tax (or GST) in India began on July 1, 2017. The Constitution Amendment Bill has replaced existing multiple indirect taxes with a uniform GST across India. The previous indirect tax structure was considered a major hurdle in India’s economic growth and competitiveness. Let’s look at the rates that have been applied, according to the new reform in the below chart.
Dual GST System
A single unified tax system is a global fiscal trend. Today, more than 150 countries worldwide have either VAT or GST. However, the one big difference between the Indian model of GST and similar taxes in other countries is the dual GST model. Many countries in the world have a single unified GST system, countries like Brazil and Canada have a dual GST system whereby GST is levied by both the federal and state or provincial governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services. The goods and service tax is expected to boost economic growth by improving business sentiment. The four different rates proposed will be applied to India’s goods and services tax as mentioned above. In other countries, a single tax rate is applied to all goods. However, the GST in India has four tax rates for different goods and services. The tiers include a 5% tax applied to goods for daily needs. The 12%–18% is the rate for processed goods. The 28% tax bracket applies to luxury goods. The government had finalised a four-slab GST structure, including two standard rates of 12 per cent and 18 per cent.
Benefits of The GST Bill
The GST is has removed the various taxes and levies across the states and replaced them with a single tax system. Some of its benefits include:
• Reducing the cost of tax compliance and transaction costs, thereby making it easier to do business
• Improving the government treasury by generating a steady revenue stream
According to Indian Finance Minister Arun Jaitley, the implementation of GST will boost GDP by 1–2% in 2017. The consumption growth and fiscal reforms are expected to drive economic growth in 2017, according to the Asian Development Bank (or ADB) report. The overall business sentiment is expected to improve in 2017 with the implementation of GST. The improved consumer confidence is expected to attract more foreign direct investment in India as well as domestic investments in capital markets. The stable and transparent tax regime is expected to encourage foreign investment in India.
The small-cap and consumer-related ETFs are expected to rise, as the consumer growth is directly linked to the domestic economy.
There is minimal impact from GST where retail broking is taken in isolation with a small increase in the amount of service tax. The impact on ancillary sectors and the overall industry is more from an aspect of changing policies and implementing new means of calculating tax which will come with its own learning curve.
The new GST rates will apply to some banking transactions, mutual funds, insurance and stock market which were earlier taxed at 15 percent including Krishi Kalyan cess and Swachh Bharat cess.
In mutual funds, the total expense ratio (TER) charged for managing funds and distributor commissions etc. would increase by 4-5 basis points. TER for mutual funds varies between 1.25 percent and 2.75 percent. The impact will not be that big, but it surely will change something for the mutual fund investors. The increase in service tax from 15 per cent to 18 per cent would make mutual funds a tad expensive. The higher expense ratio will lead to lower returns in mutual fund schemes.
When it comes to stock broking, in particular, the brokerage component on which service tax is calculated is a very small proportion of the overall transaction. This could be slightly more important for retail brokers. It doesn’t seem likely for this to have a material impact on the overall charge structures.
Loan processing fees, too, will go up due to GST. Each category of loan has a different cost structure. For instance, there is a service tax levied on processing fee and loan pre-payment fee for personal loans. The processing fee charged is approximately 1% – 2% of the loan amount plus the service tax.
Similarly, other banking services such as NEFT / RTGS / IMPS, debit card, credit card, e-wallets, cheque book service, loan processing fees etc. will be dearer now.
The introduction of the GST model is a significant development that is set to transform how the Indian taxation system works. However, considerable work needs to be done and the implication of GST for banks and financial services needs to be understood.
There is still confusion around whether GST will impact security transactions. GST is fundamentally a destination based ‘consumption’ tax whereas securities are ‘investments’. Imposing a value added tax on something which merely represents investments would go against the principle of GST. What can be subjected to GST, are services such as brokerage, commissions, bank charges, etc which inevitably accompany transactions in securities and not the securities themselves.
By Nishad MUKHERJI