With the GST going live on the 01st of July, it is essential to understand the larger implications. You may wonder what could be the impact of an indirect tax on your investments, but you will be surprised to learn that there is a very strong correlation. The GST will impact the way you plan your finances, the way you transact your investments and the way you create your investment strategy. Here is how your investments will get impacted by the GST implementation.
What if you are a regular trader in equities and F&O?
Today it is very likely that you are actively trading in equity and futures & options through your broker. There is a very basic implication for your trading activities. When you trade in cash or in F&O, your broker charges you brokerage. On top of that brokerage, there is the securities transaction tax, turnover tax, stamp duty and the service tax. As per the GST Rules, the service tax has been subsumed into the GST. However, the enhanced rate will be 18% GST in case of brokerage services. Currently, the service tax is charged on your brokerage at the rate of 15% (14% service tax + 0.5% Swacch Bharat Cess + 0.5% Krishi Kalyan Cess). Therefore, under the GST regime your service tax payable will go up from 15% to 18%. While this may not make a substantial difference to the long term and medium term investors, it can change the economics for short term traders in cash and F&O. Currently, if your brokerage rate is 1% then the service tax is 15 bps on your overall turnover. This will now go up to 18 bps. This 3 bps difference will make an impact for intraday traders and short term traders who are churning their funds quite often. For them, the short term economics of churning money will change.
Mutual Funds and PMS will be impacted too…
When you invest in mutual funds, there are costs that are debited to your mutual fund NAV. This ratio is referred to as the Total Expense Ratio (TER). The TER in case of equity funds ranges between 1.5% and 1.6%. On an average it is estimated that due to the impact of GST, the TER of equity mutual funds will go up by around 6 basis points. Remember, when your fund manager churns the funds often, he will end up paying higher rate of GST on the transactions and in turn these will translate into higher TER. Therefore, when you select your mutual fund in the post-GST scenario, you need to focus on funds that have a lower churn within the peer group. Similarly, ELSS schemes that churn less due to the nature of the lock-in schemes will be better options under GST. The case of PMS is somewhat similar. Not only will PMS schemes that churn funds incur a higher transaction costs, but even the PMS fees that is debited to your account as part of the PMS agreement will incur a higher service tax of 3 bps. Both these will add to your costs and investors need to become a lot more demanding about the effective returns on funds.
Making a case for passive index funds…
Passive index funds and index ETFs have not really taken off in India in a big way. Globally, these index funds and index ETFs run trillions of dollars. In India the availability of a large population of mid-cap stocks imply that alpha can be realized through active investing. But the GST could change the calculations quite rapidly. The higher cost will mean that active fund managers will require to generate more alpha to cover this additional cost and that also will have to be done with minimum churn. As the Indian markets start getting increasingly driven by macros, many investors will begin to realize the hidden benefits of passive investing. Do not be surprised if active strategies like index funds and index ETFs take off in a big way as a result of the GST.
Equity could be the big beneficiary from the GST story…
This is an important take-away from the GST. It is estimated that the GST implementation will bring about a GDP accretion of 2-3% over the next 3 years. On a GDP base of $2.5 trillion, that is quite a substantial income accretion of $75 billion. If one applies the Market Cap / GDP ratio to this figure, one can see the wealth effect it will have on the market. The best way to play this story will be to play growth and the best way to play growth will be to play on stocks that are consumer centric or contingent on a revival of the capital cycle. There is another equity aspect to it. GST will result in substantial savings in terms of logistics costs and result in logistics efficiencies. That will be a big boon to sectors like FMCG, two-wheelers, automobiles, consumer durables etc. All these sectors will see their distribution and logistics networks being re-designed on the basis of business considerations rather than on inter-state tax regimes. The efficiencies that it will bring about can be effectively played through the equity route.
For investors, the GST will be a major game changer. While costs of transacting will surely go up, the concomitant benefits in terms of value will be positive as an outcome of GST.
You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline