How will the GST affect the stock market

Uniform taxes for India's economy

The Indian Goods and Services Tax (GST) recently came into effect. While challenges may arise in the short term, the medium to long term implications for the Indian economy are expected to be positive.

With the newly introduced tax on goods and services, the Modi government is continuing its plan to modernize and streamline the Indian financial system. The aim is to simplify the complex system of regional taxes. India is made up of 29 states and prior to the introduction of the GST, Indian companies had to pay taxes every time they tried to sell goods or services across state borders. The GST will now replace a total of 17 taxes at the national and state level. (1) Due to the complexity of the previous system, the logistics were very laborious and costly. Unofficial bribes were the order of the day. As a result, logistics costs in India were among the highest in the world at 13-14 percent of GDP. In comparison, they average 9-10 percent of GDP in Brazil, Russia and China and 7-8 percent of GDP in industrialized countries.

The GST replaces the old state-by-state system, making India a common market for the first time since gaining independence in 1947.

What does GST mean in practice?

In addition to reducing logistics costs for businesses, the GST will also have an impact on the tax rate consumers will have to pay when purchasing goods and services. The reform includes the creation of different tax brackets. These range from completely GST-tax-exempt levels for basic food and hospital bills to a maximum of 28 percent for consumer electronics and cinema tickets.

In the future, companies will have to submit their tax returns electronically, which will make it more difficult to avoid taxes. Those firms that are already in compliance with the tax regime have an advantage and we think there will be a business shift from the informal sector to these firms.