The Unparalleled Tax Reform

Fri, 23 Jun Pre-Open

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Whether as "India's Great Migration Challenge," or its "landmark tax reform", the introduction of the Goods and Services Tax (GST), has hogged media headlines for a considerable while now.

With an overload of information and analysis, the common man cannot be blamed if he feels slightly confused by the entire issue. So, who exactly will benefit the most from GST?

There are expectations that the tax reforms will noticeably reduce compliance cost for taxpayers, harmonise the tax structure, while transforming administrational operations into a uniform entity across states.

The listed players or organised players would benefit largely as opposed to unorganised ones.

The high degree of informality in India has become a matter of public debate since the demonetisation gamble of 8 November. The informal unorganised sector accounts for 40% of India's GDP and a lion's share of total jobs. The informal sector, which thrived on tax arbitrage will yield market share to the formal sector.

Moreover, the move to the new tax regime has the potential to cause immense disruption to the shadow economy that is the source of livelihood for many.

However, the 'unorganised-to-organised Megatrend' is evident in several industries - be it mortgage (unorganised/untapped to organised), logistics (consolidation of warehouse space), or consumption-based companies like FMCGs, jewelry, and consumer electricals (unbranded to branded).

So how are we making the most of it?

There will be an indirect benefit to that part of the formal sector which will benefit from the reduced competition. We are talking about the small-cap stocks. Richa Agarwal, who heads our Hidden Treasure service, wrote about this in an edition of the Research Digest:

• "With all the changes taking place around us, it is the informal segment and unlisted small businesses that will be worst hit. The cost of doing business for companies in the unorganised segment is likely to go up.
  
  Accounting norms are likely to become clearer and stricter for all, and tax evasion will be more difficult. Meanwhile, India is expected to take further steps in the direction of a cashless economy.
  
  With GST close on the heels, the story of India, for listed small companies, has become better at the cost of unorganised segment".

Today a number of players in the informal economy are only able to compete with the larger and more organised sector players because they are able to take advantage of tax and regulatory arbitrage. This is why the GST, with better tax administration and compliance, will force a shift of trade from the unorganised to the organised sector.

Implementation of GST would convert India into 'One nation, one market', sharply reducing the logistics cost in transportation of goods.

We believe that GST is one of the key reforms that has the potential to bring about a structural change in the Indian economy and might prove to be one of the catalyst that could accelerate the shift toward organised economy.

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