How GST would play out for retail investors

Investors benefit from the rise in share prices of the stocks/ companies with improving profitability. With introduction of GST, there would be a shift from informal economy to formal one as the organized players drive sales and margins due to creation of level playing field largely benefiting the branded players, reducing cascading impact of taxes, widening of tax compliance and improved efficiencies in supply chain. The listed players or organised players would benefit largely as opposed to unorganised ones. Globally, the introduction of GST has shown that the GDP of the country will improve 50-150 basis points (bps) over two to three years, post implementation. In India too, the same story is likely to repeat over coming few years.

The biggest impact of GST would be on unorganised sector. With reduction in compliance cost, cascading tax etc., the organised segment would be competitive with the unorganised sector, leading to loss of market share for the latter. The sectors with high market share of unorganised segment could witness a tectonic shift offering level playing field to the organised players. Sectors like leather goods & footwear, plywoods, sanitary ware, healthcare and diagnostics, packaged foods, textiles etc. will witness shift to formal economy. GST implementation will also benefit sectors like logistics, FMCG, media & entertainment, cement, textiles, consumer durables, etc.

GST comes with in-built tax input credit mechanism which means taxes are paid only on the value addition at every stage. This reduces the tax-on-tax also called cascading effect of taxes, thereby reducing the prices of end products for the consumer.

This would be effective in containing inflation and the end product prices will reduce. This would enable higher consumption especially of consumable staples and non-durable goods.

Hence, a retail investor can position themselves in the consumer staples and/or consumer non-durable stocks from investment horizon of minimum two years to benefit from the increment in FMCG volumes and consumer non-durable goods.

In current tax regime, each state has different tax rates for goods which means increased and tedious paper work. Post GS implementation, there would be free flow of goods/ trucks across the borders, thus reducing the logistics cost for goods which eventually would reflect in reduced prices of end products. With improved utilisation of their fleet, reduced freight charges and enhanced business, logistics companies- especially those using roadways would benefit. The retail investors can benefit from investing in logistics providers with investment horizon of two years.

Materials like cement and construction metals are expected to be benefited due to the lower landed cost as GST replaces different auxiliary taxes like octri, entry tax, etc. Moreover, there will be no need to build warehousing infrastructure in case of inter-state sales, which would lower distribution cost. Since raw material prices viz., cement and steel, will reduce, infrastructure will benefit.

Media and entertainment segment are also likely beneficiaries of GST since tax incidence for exhibitors and distributors is expected to be lower than the entertainment taxes currently levied on them. Moreover, the operating margins would improve as they’ll be eligible to claim credit for the tax outgo on utility payments, rentals, etc.

Organised textiles and consumer durables, would be beneficiaries of level playing field against the unorganised ones. Moreover, lower end product prices would enable higher consumption in volume terms thus benefiting the organised players.

Thus, an investor can benefit from GST by investing in orgainised sectors like FMCG, consumer non-durables, consumer durables, material such as cement and steel, logistics, textiles, media and entertainment, with an investment horizon of not less than two years. Streamlining of this new system would take time and the fruits would reflect in the earnings of the aforementioned sectors.

INVEST IN ORGANISED SECTOR

• Raw materials are expected to be benefited due to the lower- landed cost as GST replaces different auxiliary taxes
   
• An investor can benefit from GST by investing in FMCG, consumer non-durables, consumer durables, material (cement and steel), logistics, textiles, media and entertainment
   
• GST comes with in-built tax input credit mechanism which would also be effective in containing inflation

The writer is managing director and CEO, Axis Securities