A 2 per cent additional GDP growth, big market share gains for organised businesses thanks to the demise of unorganised sector and substantial rise in tax-to-GDP ratio were billed as three biggest benefits that India would see from an major indirect tax overhaul rolled out last year.
One year since the goods and services tax (GST) was rolled out on July 1 last year, the most visible disruption was a business slowdown due to the transitory effect.
Elsewhere, the benefits have started reflecting in small measures across sectors, which analysts say, should be cues for investors to capture the big growth that the economy is going to witness in the coming months and years.
Finance Secretary Hasmukh Adia on Tuesday said the GST system has since stabilised, some 1.11 crore businesses have registered themselves under GST so far, and average monthly compliance of return filing and tax payment should rise to around 96 per cent in a few months. He said the government was looking to mop up on an average Rs 1 lakh crore in taxes every month this year.
Going by early tax collection trends, analysts and economists say the tax-to-GDP ratio may improve substantially over the next four years.
The pace of tax collection was a tad slow due to deferment of the E-way bill. But things should look up now, analysts say.
Pankaj Pandey, Head-Research, ICICIdirect.com told ETMarkets.com that management commentaries across the consumption as well as industrial sectors have been bullish, indicating that the business environment has changed for the positive since GST rollout.
“With the interstate E-way bill due for implementation in July, we expect the domestic economy to reap the fruits of enhanced tax compliance and collection,” Pandey said.
He projected monthly average tax collection at Rs 98,700 crore in FY19 against the monthly average of nearly Rs 90,000 crore last financial year.
Pandey said this is an opportune time for investors to focus on companies that may benefit from the formalisation of the economy.
Indias equity benchmark BSE Sensex has gained 15 per cent since GST rollout till June 26 this year, while the index that represents the consumer durables sector – a segment expected to see solid market share gains from formalisation of business – advanced 26 per cent in the same period.
Pandey said March quarter corporate earnings, too, were testimony to the success of GST implementation.
For Q4FY18, net profit of the Sensex pack, excluding the banks, grew around 15 per cent year on year, making it the first quarter in five to record double-digit bottomline growth.
This growth was attributable largely to robust consumer demand reflected in around 24 per cent year-on-year (YoY) growth in auto sales, double-digit volume growth in FMCG and around 15 per cent YoY growth in cement sales, he Pandey said.
The transitory impact of GST implementation took a toll on earnings performance of many industries in FY18; but that was broadly expected, says Rajeev Srivastava, Head of Retail Broking, Reliance Securities.
“Looking at the GST collection estimates in Budget 2018 and the actual collections seen in the first two months of this financial year, we expect an improvement in GST collection going forward, which bodes well for the economy,” Srivastava said.
Consumer-oriented companies witnessed the positive impact of GST with robust volume growth over the past few months. The BSE Consumer Discretionary index is up more than 11 per cent since July 1, 2017.
“It was largely on account of passing of the benefits to end- consumers by way of lower product prices in adherence to the anti-profiteering norms. Next three months will be crucial wherein the real impact of GST would be felt post successful implementation of interstate as well as intrastate e-way bill.
The building material space, including tiles and plywood, is possibly only area yet to see GSTs positive impact,” Pandey said.
India is poised to remain the fastest growing large economy in the world this year, and its GDP is projected to tough the $5 trillion mark by 2025, as the economic reforms adopted in last few years have started to bear fruit.
GST will play a crucial role on achieving this GDP landmark.
“With better compliance and tax collection under GST, Indias tax-to-GDP ratio is expected to inch up toward 13 per cent in four years from 11.5 per cent at present. This can fuel further government spending on social sectors, and healthcare stands out to be a key beneficiary,” Pandey said.
The entire consumption basket, the logistics (surface transportation), building materials and plastic pipes segments would be other key beneficiaries of GST in the medium to long term, Pandey said.
He prefers TCI, TCI Express, Supreme Industries and Greenply Industries from these segments.
Abhimanyu Sofat, Head of Research, IIFL Securities said in the long run strong brands will make significant gains in sectors where unorganised players have significant market shares.
Sofat is bullish on Symphony, Havells and Voltas in the air cooler segment, where unorganised players have almost 80 per cent market share.
He is also betting on Bata, Relaxo, Century Plywood and Greenply Industries to benefit as in these segments, unorganised players have market shares in excess of 60 per cent.
GSTs deepest impact has been on the MSME space owing to challenges with the systems and processes of GST tax filling and additional cost of compliance.
Moreover, GST requires businesses to pay their tax liability in full and then claim refund, which has led to an elongation of the working capital cycle. However, most of these issues seem to be transitional in nature, as businesses adapt to the new regime.
There is no doubt that formalisation of the economy through GST will bear fruit in the long run, say analysts.
“The transition from unorganised to organised sectors is yet to play out, as delay in implementation of e-way bills elongated the process. A level-playing field is expected to benefit sectors such as building materials (tiles, sanitary wares), consumer products and dairy industries,” Srivastava said.
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