Melissa Frakman on the impact of India's sweeping tax reforms

Who Benefits From India's Sweeping Tax Reforms?

August 9th, 2016

By: Kenneth Rapoza

Last week’s much anticipated tax reform law in India has laid to rest any doubts that Narendra Modi can deliver sweeping changes in this nation of 1.3 billion inhabitants. The only thing to do now is to get over a dozen states to sign off on the law so it can be implemented. India has finally created a single market for itself. Who benefits?

The Aug. 3 passing of the goods and services tax, or GST, is a big reduction in compliance costs for manufacturers that have assembly lines set up across state lines. Manufactured goods are currently subject to excise duty, value-added taxes (VAT), and a central sales tax, all of which will be part of one simple GST. The indirect tax component will decrease from 27-30% to 17-18% with GST, making a number of those goods more affordable for consumers, say analysts from the Albright Stonebridge Group in Washington.

“A big winner of the reform is foreign direct investors, including multinationals and global private equity funds, who will benefit immensely from a more predictable, transparent, and consistent tax climate,” says Melissa C. Frakman, a senior director for Albright Stonebridge. She said this was particularly true for companies engaged in intrastate commerce such as logistics, manufacturing, and agriculture. “Domestic startups will win in several ways, including more simple operating structures and a renewed appetite from global private capital for Indian assets,” she said.

Foreign single-brand retailers have been awaiting this reform since 2014 because it unifies taxes on manufacturing, packaging and distribution across state lines. From apparel to electronics, retail margins are expected to benefit from the GST, including rent offsets and further margin support stemming from a streamlining of operating structures.

Credit Suisse lists Hindustan Unilever Ltd., Colgate-Palmolive India Ltd. and Asian Paints Ltd as examples of the types of product-makers that will benefit. Credit Suisse analysts led by Arnab Mitra said in a July 4 report that their current sales tax of around 25% will fall as low as 17%, helping with margin and pricing power.

GST will also ease compliance and boost sales for e-commmerce, says Albright Stonebridge. E-commerce companies like local star Flipkart will be liable to collect taxes from suppliers on their platform at the time of sale which could increase their accounting burden and diminish working capital available to small sellers, the DC based consultancy noted in a report published last week.

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