Soon, the numerous indirect taxes like Service tax and excise duty will be extinct. They will be replaced by the Goods and Services Tax (GST)—a single tax meant to simplify the tax system. Naturally, this is expected to have a ripple effect on multiple aspects of the economy. This includes you, the investor. After all, the financial products you invest in are affected by economic changes.
If you are a stock investor, then you need to know what affects the company whose stocks you own. The same goes for many equity fund investors too. Even debt instruments can be affected by the reform. Interest rates are heavily dependent on macroeconomic factors.
Here are 5 ways the GST rates could affect you:
GST was slated to make the Indian economy grow by 1-2%. However, there were also worries that it could be inflationary and limit growth. But, the rates suggest that there could be a minimal impact on inflation, according to a report by Kotak Mutual Fund. This is good news for those worried about an increase in interest rates by the RBI. However, in the short-term, the change in tax system could disrupt growth marginally, the report added.
The GST rates are dependent on how essential the good or service is. For example, regular essentials like milk, essential medicines, etc. have near zero GST rates. Some other regularly used goods/services like sleeper trains, economy class flight tickets, kerosene, dish TVs, certain oils are also taxed lower at 5%. This is good news for sectors like consumer goods, low-cost airlines, dairy industry and even the coal industry. They will be taxed at a lower rate than earlier. This could cut costs and increase profits. This is why stocks of FMCG companies shot up after the GST announcement.
Not every industry is happy, though, especially the auto industry. Luxury products like vehicles (except tractors), a few consumer goods items like chocolates, home appliances, 5-star restaurants and hotels, and certain entertainment sources will be taxed at the higher rate of 28%. A few other items from the media and consumer goods industry too will see an increase in tax payout. This could increase the price of such goods/services, hurting demand. If you own the stocks of such companies, do check if the product or service is essential or in high demand. Companies can then pass on the increase in costs. This could limit the negative impact on profits.
Few industries cheered, some others complained. But for the majority, the impact of GST is likely to be minimal—at least from a cost point of view. This is because there is little difference between the effective tax rates they pay now and the GST rate.
Your other investments could be affected, though. Financial services companies may have to pay a slightly higher tax rate of 18%. This could affect mutual fund investors, insurance policyholders, and even depositors. However, the actual impact is likely to be marginal, as per a Livemint report*.
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