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India's 12-year road to tax reform about to pay off

Ashburton India fund manager Jonathan Schiessl explains how the country's new Goods and Services Tax will boost its economy.

India's 12-year road to tax reform about to pay off

After what seems like decades of heated debates, India finally launched its Goods and Services Tax (GST) on 1 July. 

Although proposed in 2005 by the Gandhi family-led Congress party, years of opposition ended in August 2016 with Congress acceding to the demands of Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP). 

Yet it was the BJP that were the primary dissenters, believing that India’s myriad taxes were sufficient for the needs of the 1.3 billion people across the country.

However, once in power, Modi’s 180 degree turn was inevitable given the efficiencies that can be expected to be delivered by a much more streamlined tax structure. 

Following on from his landslide election victory in 2014, Modi made the introduction of GST a key component of improving business operations, driving growth, and encouraging greater international investment into the country. 

Although not a single rate of tax, as was initially proposed, the four rates of tax is a substantial improvement on what it replaces. Some sectors have seen their effective tax rates increase while others have seen reductions. 

However, the key outcome from the introduction of a pan-Indian tax will be the extensive efficiencies that businesses will experience moving forwards.

To give an example, currently a truck carrying goods from the north to the south takes an average of 21 days due to the many stops required at border crossings to pay custom duties and file paperwork. 

Following the implementation of GST, it is forecast that same journey will take just nine days, a considerable improvement. 

The announcement of demonetisation in November 2016 was one of a number of steps the government have taken to clampdown on corruption, tightening the noose around those operating within the informal economy. 

Conservative estimates of the size of India’s informal economy are between 50 to 65% of the formal economy, thus initiatives such as GST will force businesses, kicking and screaming in some instances, into the formal arena, thus contributing to India’s official GDP data for the first time.

It must be accepted that there will be initial teething problems, this is a significant milestone for India that will deliver greater efficiencies for business and individuals alike.  Its introduction will accelerate Modi’s unrelenting desire to drag the informal into the formal economy, and thus be positive for India’s GDP growth and government tax take. 

Modi continues to take India in the right direction, pushing through reforms that previous governments did not have the ability to deliver.  India remains on the path to steady growth, enabled by initiatives such as the launch of GST.

Citywire AA-rated Jonathan Schiessl is manager of the Ashburton India Opportunities fund . Over the last three years the fund has returned 90.2% versus a peer benchmark of 82%.

There are 43 single country funds investing in India alone. You can find details of them here.

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