India’s financial industry is expected to be the main beneficiary of better tax compliance after the recent introduction of the goods and services tax (GST), as well as last year’s surprise demonetisation, PhillipCapital says.
The GST, which became effective on July 1, is a “comprehensive game-changer tax” that replaces a complex tax structure with uniform rates, “making India a truly single market,” according to a research report from the Indian unit of the Singapore-based financial services company.
It notes that the number of vendors and small business owners registering for the GST has increased sharply in recent weeks, and that the demonetisation nine months ago seems to have paved the way for a smoother rollout of the tax.
“The biggest beneficiary of better tax compliance is the financial market,” PhillipCapital says.
The Indian government removed high denomination banknotes from circulation and replaced them with new bills last November in the shock demonetisation. One reason, it said, was to combat terrorism financed with counterfeit notes.
According to the PhillipCapital report, the move has had a “huge negative impact” on real estate deals and prices, and appears to be changing the traditional preference Indians have for such physical assets.
A lot of the money that used to go into real estate is now flowing into financial assets.
“Financial assets are fast emerging as the most favoured asset classes. While demonetisation has acted as a catalyst for growth of financial assets, GST will lead to this growth sustaining,” the report says. “As GST will lead to a much faster growth of the formal economy, the need for financial assets is bound to accelerate.”
To be sure, there will be teething issues. But according to PhillipCapital, the GST’s gains are becoming more evident across industries.
“GST will prove to be a critical factor for sustaining the growth of investments in the Indian equity markets. Investments in the secondary market as well as direct investments should also rise,” the report says. “This journey, of realising India’s true potential, has only just begun – and there are miles to go from here.”
