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GST: Short term pain, but new tax regime will deliver the goods, say analysts

LiveMint logoLiveMint 30-06-2017 Ami Shah

Mumbai: As the goods and services tax (GST) kicks in on Saturday, analysts at securities houses are predicting short-term pain followed by long-term gain. Pain could be in the form of technical glitches and difficulties in adjusting to the new indirect tax regime. Eventually, GST will lead to a streamlining of processes, bring cost savings and improve ease of doing business, they say. Here is what some top brokerage firms have to say about the impending change and its implications:

Kotak Institutional Equities: The short-term impact of GST could be neutral to negative for the broader economy. Production processes will likely take some time to align with the new framework as firms adjust to the input tax credit system and get a handle on working capital requirements. The economy stands to gain over the long term as efficiency improves and higher government revenue translates into higher growth potential. Immediate challenges revolve around compliance, infrastructure and logistics of the GST system. Over the next few quarters, the focus will turn towards reforming business models and gaining efficiency.

Morgan Stanley: GST is likely to have minimal direct impact on consumer price inflation. The implications of the GST reform range from creating a simplified and more compliant tax system to directly benefiting the logistics sector. According to our industry analysts, the impact of GST rates is likely to be positive for consumer staples and media, and negative for airlines, and oil and gas. For autos, hotels and telecoms, the impact is likely to be neutral to marginally negative; for cement and steel, it should be marginally positive.

Reliance Securities Ltd: There may be some disruption in business in the near term due to teething troubles, but the new GST framework would move the economy towards a common Indian market, reducing the cascading effect of multiple tax layers and increase revenue buoyancy for the central and state governments. By leveraging advanced technology infrastructure and systems, the GST framework is expected to bring greater transparency and simplicity in tax administration and compliance. Tax uniformity across states would facilitate free movement of goods and services, with better compliance.

Edelweiss Securities Ltd: GST will lower logistics costs owing to a decline in transit time because of the elimination of multiple checkpoints and consolidation of warehouses. The cement sector incurs high logistics/freight/transportation costs, as a proportion of revenue, followed by packaged consumer goods, and the metal, chemical and paint sectors. On the flip side, reduction in transit time (30-40% savings) may lead to lower demand for commercial vehicles over the medium term.

Nomura Financial Advisory and Securities (India) Pvt. Ltd: Companies seem to be 100% ready for GST, but distributors are only partially ready, and wholesalers and retailers are still struggling to adapt to the new regime. Among the most worried lot is the wholesale channel because it works on the thinnest margins and risks narrowing them further on account of compliance costs. The wholesale channel deals mostly in cash.

Motilal Oswal Financial Services Ltd: GST may disrupt the system for a few days, weeks or months as people are not yet fully prepared for the transition. Inventory pile-up, reconciliation of stock-in-trade and a host of other issues may create bottlenecks for some time. In the long term, the new system will act as a much better taxation grid as it will convert the county into one single market, eliminating the loopholes associated with indirect taxation.

Bank of America Merrill Lynch: There has been much anguish about the increased complexity of the GST system, as compared with initial expectations, and the hurried manner of implementation. On the ground, this lack of readiness at businesses will impose costs in terms of both money and time. These should be temporary and are unlikely to be fatal. With help, most will adapt to the new tax filing system. The impact of GST on listed company volumes and earnings may extend beyond the June quarter.

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