Has GST impacted investments in India? The typical reaction would be; what does GST have to do with the investment scenario in the stock markets or Demat Accounts? But the fact is that the GST does impact the Indian investment scenario in a variety of ways. In some cases the impact is direct as the costs can be directly felt in the service delivery. In some cases, the impact is indirect as it skews investment attractiveness of certain sectors. In addition there are also cases where such effect of GST can be corollary. Let us see some key implications of GST on the investment climate…
Higher rates of GST on equity transactions
This is a direct impact of the Goods & Services Tax (GST) and it translates into higher cost. How does that happen? When you transact in shares in the stock markets (buy or sell), then there is a series of statutory costs that you pay over and above the brokerage that is charged. Prior to July 2017, transactions in equities were subjected to 15% service tax including cess. However, post the implementation of GST, this stands modified at 18%. Effectively, if you pay Rs.100 as brokerage, then your actual cost will now be Rs.118 due to the impact of GST. Unlike STT, which is imposed on the value of the transaction, the GST is imposed on the value of the brokerage. For intraday traders and scalpers, the GST has substantially pushed up their costs and also their breakeven levels for trading. GST will also push up the annual maintenance charges (AMC) imposed by your DP.
Higher rates of GST on mutual fund services
You will be paying 18% GST on all the mutual fund services that you will be enjoying. Here are two ways in which it impacts you. Today, the mutual fund model has largely shifted to being an advisory model. Most mutual fund investors are paying advisory fees to their advisors on an annual basis. The effective cost of these fees will go up sharply for the clients. Secondly, the fund pays GST on the management fees that it debits to the fund. As per the latest SEBI regulations, equity funds are allowed to charge up to 2.50% as Total Expense Ratio (TER). In addition, they can charge 30 basis points for funds sold outside the top 15 cities, taking the cost to 2.80%. In addition, the fund is allowed to bill the GST paid by them on the management fees also to the clients. Also the fund will be paying higher GST on all services availed like audit services, legal services, registry services etc. All this will add up as costs to the customer.
How GST will impact PMS schemes?
Portfolio management schemes have long been the preserve of the HNI investors. Most PMS scheme collect hefty fees from the clients which can range from 4-5% on a flat basis. In addition, PMS schemes also charge you an additional kicker fee if the profit delivered by the PMS is above a certain threshold. With alpha becoming harder to generate, the cost of a PMS will come under question. The higher GST is only going to exacerbate this debate.
How will it impact low GST rate stocks?
One of the features of the stock market in the last 1 year has been the outstanding performance of FMCG stocks. It is not without reason. The GST Council reduced the GST rates on most of the food items and food products to the range of 0% or 5%. In almost all the cases, the benefits have been passed on to the end customer leading to a spurt in demand. It is hardly surprising that research firm Nielsen India expects FMCG sales to grow at 12-14% for the next few years. If you look at any of the FMCG stocks with a food focus like Hindustan Unilever or Britannia, the performance in the stock market has been stupendous. To that extent, GST has opened up new reasons for investors to invest in the Indian consumer story.
How will GST impact logistics industry?
This is a slightly more complex argument as far as GST is concerned. The idea is that GST is going to totally revamp the approach of businesses to logistics. Prior to introduction of GST, large companies like Hero Moto, ITC, Hindustan Lever, Bajaj Auto, Havells and Maruti used to maintain an all-India logistics network that was designed around the inter-state sales tax and entry tax structure. In most cases, these logistics arrangements were not optimal. What GST has done is to force companies to look at logistics as core to their business efficiency rather than a method of managing taxes and compliance. This will unleash the full potential of logistics since interstate taxes are now fully done away with. On a similar vein, the scrapping of excise duty will also blur the difference between organized and unorganized segments. That will further narrow the gap and will be hugely beneficial for sectors like paints and electrical goods where the unorganized segment is very prominent.