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The Ride to GST, Smooth or Bumpy?
Mon, 19 Jun Pre-Open

The government has relaxed the timelines for filing tax filings for businesses under Goods and Services Tax (GST) for the first two months. It is an indication of the uncertainty surrounding the implementation of one of the biggest structural reforms in the Indian economy.

Apart from paperwork, the past few months has seen de-stocking by a large number of wholesalers and retailers across sectors. It has to do mainly with uncertainty related to tax rates on goods purchased prior to implementation of GST. Most of the sectors have started offering discounts to dispose their goods before 1st July. As a result, there's bound to be a shortage of supplies leading to inflation before things normalise.

Recent quarterly earnings calls from the management of various companies hinted at a slowdown in the near term. Apart from de-stocking, there is confusion related to implementation of GST. A lot of wholesalers who are currently outside the tax bracket contribute an estimated 35-40% in trade in the value chain.

While large organised players have been preparing for a long time for implementation of GST, it is these unorganised players who are facing major issues during this transition to a one nation one tax rule.

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We had witnessed similar de-stocking during notebandi. A lot of companies had reported lower than expected numbers post notebandi. A similar trend in business has been observed lately. This comes at a time when markets are at lifetime highs. Valuations have sky-rocketed in the hope that growth led earnings will eventually catch up.

Are investors ready to face one more turbulent ride such as the one they witnessed during notebandi. While markets recovered smartly post notebandi, will it be resistant to one more earnings growth disappointment in the upcoming quarter.

Although there is bound to be short term pain in the markets, as far as GST is concerned, we believe it is one of the biggest structural reforms to be implemented in the Indian economy. It will also provide a level playing field to the organised players from sectors with a high proportion of the unorganized segment. Its implementation promises to transform India into a single common market and there are many sectors which will gain immensely from this transition.

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