How will GST actually impact equity investors
Dated NEW DELHI, September 3, 2017
Equity investors can broadly be categorised under the Traders or the Long term/Short term Investors. Brokerage, as a compensation for the facilitation of the service of buying/selling of equity shares, is levied by the broking house on the basis of delivery/non-delivery of shares and charged as per the pre-negotiated rate over the volume of the trade. This brokerage, specified as a service, attracts two major components of taxes; Securities Transaction Tax and Service Tax besides other static non-material taxes like SEBI charges, Turnover tax. It is the Service Tax which has had an impact from the implementation of GST. There has been a marginal increase of 3% i.e. from the previous 15% to 18% in the levy of Service Tax, which would cause a nominal dent to an investor. From a traders’ perspective, every additional cost incurred is the profit forgone, 3 basis points in this instance, and could demand a reworking of the trading strategy. Post implementation of GST, there were apprehensions of the markets being affected by lower volumes and tightening of liquidity as a consequence of such increase in costs for traders, but the recent Bull Run has expunged such anxiety.
However, despite the insignificant impact on equity, there exists an ambiguity over the determination of ‘securities’ to be included under the definition of goods under the GST Act. If this takes an inclusive stand, then GST would be levied upon the transaction of buy/sale of shares. However, if one were to interpret the basis of taxation under the old Value Added Tax regime, securities were excluded from the definition and such transactions were beyond the ambit of Sales Tax as securities were not construed as Goods. The fundamental principle against this inclusion is the fact that securities are to be viewed as Investments and not as tradeable commodities. GST is a consumption tax whereas securities are merely investments. If one were to peruse through the Service Tax law, it would be interpreted that although the definition of goods under this law includes securities, the intention for doing so is to exclude it from being subjected under Service Tax as trading in goods is beyond the scope of Service Tax. But this interpretation, on the basis of Service Tax laws, would be incorrect as subjecting GST to investments would go against the very essence of tax on value addition or consumption. However, the same principle cannot apply to ancillary services like brokerages, commissions that enable in facilitating a trade on the bourse.
It’s actually a gain
While the corporate India faces the teething problems related to the implementation of GST and although the short term impact of this massive tax metamorphosis could be projected to be negative and the corporate earnings may take a dent for a couple of quarters while they acquaint themselves with the new tax framework and streamline their processes for compliance, the equity investors stand to indirectly benefit from the long-term macroeconomics perspective. A projected 2% growth in the GDP for the next couple of years will give an adequate boost to the wealth creation process.
From a sectorial perspective, the beneficiaries are the sectors that have a long value chain from basic goods to final consumption stage and include Logistics, FMCG, Automobiles, Metals, Capital Goods, Consumer durables as the manufacturing and distribution networks, sales depots were based on the state level taxes and levies. With the subsuming of these taxes, the business policies with respect to manufacturing, logistics, creation of distribution centres may require a redrafting, and suitably aligned on the basis of efficiencies, logic, cost controls and several such measures to boost profitability. The streamlining of input credits will further help in strengthening the GST operations. The investor in the role of a consumer will be benefited in terms of the reduction of the overall tax burden, avoid double taxation which would further lead to a reduction in costs of goods and services by encouraging competition in the long run.
Change and disruption are the prerequisites for a progressive future that need to be incubated, adapted and harnessed with a positive approach for the betterment of the society. Change has never been easy but it is inevitable to stay stagnant. Despite its gigantic implementation hurdles, GST is a positive reformation step towards a developed economy with good regulation and greater transparency. With the overhauling of the indirect tax regime, the long term benefits are bound to outweigh the short term impediments.The fact that the markets breached the Sensex 31,000 benchmark is proof enough of investors cheering the new tax regime and believing in the long term robust India story!