India is warming up to welcome a reform in indirect taxation, termed as one of the biggest reforms post-independence. In all likelihood, the Good and Services Tax (GST) is soon to become a reality before this monsoon session of the parliament ends. For the last two years, the NDA Government has been sweating to pass the GST Bill. Finally now, it can see some light at the end of the tunnel. Lok Sabha has cleared the Bill without many glitches, but it was stalled in Rajya Sabha for months, where the ruling alliance did not have the majority needed to pass the Bill. However, it seems, the Government might have managed to reconcile differences with the opposition.

Without any doubt, the proposed law is revolutionary but more than that due to the provisions proposed therein, the law came into the spotlight because of the political impasse it created. Its passage (and non-passage as well) became an ego problem for India's two national level parties. Since, the egos on both sides have mellowed, the way to enactment of the Bill appears clear.

PersonalFN recently covered two stories highlighting what the GST is all about and why it's being opposed.

If GST Is Revolutionary, Why Are Opposition Parties Blocking It?

Will The GST Bill Be Passed In The Monsoon Session Of The Parliament?

The media hype on GST has made many believe that GST is really going to change all rules of the game for the Indian economy. If you too believe so then probably you are missing the bigger picture.

1. Effective implementation of GST is the key. The only enactment is not going to solve any problem. GST requires robust I.T. infrastructure, which is not in place at the moment.


2. If a seller fails to comply with GST and file the right return, the input credit won't be available to any of its customers. In short for the negligence of any one party in the production and supply chain, others might suffer. In other words, GST would require a lot of self-discipline and the willingness to comply.


3. GST needs to be implemented pan India at one go. A partial implementation may dilute its impact.


4. Countries such as Australia and Malaysia have witnessed a spike in inflation and slack in consumption after the roll out of GST, although for the short term. India shouldn't overlook these examples.


5. The rate of GST is extremely crucial as the higher rate will act as a dampener for the consumer demand.


6. GST, to take full effects, has to be complemented with reforms in other state laws such as labour laws. As many as 25 states are yet to improve their labour laws.

The notable positives are…
Having said this, GST has some obvious benefits. It is likely to curb the corruption in the indirect tax departments as I.T. Infrastructure will reduce the human interventions in the process of tax collection and tax compliance. Secondly, GST is likely to offer ease of doing business. Till now, many companies were setting up their production bases and warehouses keeping in mind the taxation disparities among states and different areas within the state. Now with the uniformity in taxation, the companies will focus on the overall attractiveness of the sites, production facilities, and warehousing. The third most significant benefit of GST is that inter-state movement of goods will become seamless.

PersonalFN believes, considering all positives and the negatives, GST is a two-way sword. If the Government ensures effective implementation and the State Governments cooperate, it will contribute to the progress of the economy. Incidents of tax evasion may be minimised with effective implementation.

A word of caution for investors…
Equity markets have been falling at a time when we are so close to the passage of GST Bill. This is a classic case of how even good news fails to make an impact if it has been already factored in the stock prices. Hasty advisors are ready to sell you positive stories about GST and their positive impact on the Indian economy. Please ignore their lofty commentaries. It's better not to take any investment decision based on market speculations and expectations. Rather you should focus on your financial goals and the asset allocation.

If you want to benefit from positive macroeconomic developments, you should leave the job of analysing investment opportunities to the professionals. You might consider investing in mutual funds. And if you are unsure which fund to invest in, consider taking advantage of the unbiased mutual fund research services offered by PersonalFN.

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