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GST Reform to Take India Growth Rate to a New Level

Just when investors thought India could not grow any faster, the new Goods and Services Tax (GST) is projected to help boost the world’s fastest-growing, major economy by as much as 2 percent, according to Finance Minister Arun Jaitley.¹


On August 3, 2016, the bill passed in the Upper House, with an overwhelming 197 members in favour of the new bill, out of a total of 250. Approval on additional details of the bill is currently pending with members of the Lower House. Given the strong support received in the Upper House and that the bill was initially approved by the Lower House, it is highly likely that this landmark reform will go through.


The Indian government is aiming to roll out the the GST bill by April 1, 2017, with full implementation expected by fiscal year 2018-19. The bill will create a uniform tax system across all of India, benefiting local companies and vendors, as well as consumers, while also signaling to foreign investors that India is serious about implementing market-friendly policies, that will make it easier to conduct business within its borders.


Key features of the new GST law


For local companies, cost savings in the transportation and storing of goods are expected to be the main benefits of the new GST bill. Additionally:

  • The tax rate on goods will be slashed from 25-30 percent to around 18 percent²
  • Taxes will be paid at the point of purchase, not at state borders
  • Long lineups that are regularly seen at border checkpoints, will be reduced
  • Thousands of small company warehouses will be replaced by a few zonal hubs


A World Bank report showed that Indian companies can save up to 40 percent in logistics costs that they previously incurred at checkpoints and toll plazas.³


The long-term macro impact and importance to investors


India is undoubtedly one of the most compelling growth stories for investors today. With the economy currently expanding at a rate of 7.6 percent⁴, investors simply cannot find this kind growth anywhere else. The new reform will help to take India’s growth rate to a new level in several ways, and this is great news for investors in India.

 

By creating one tax at the point of purchase, GST will significantly expand the tax base, increasing government revenue. This additional income will flow back into the economy via spending on infrastructure and social programs. Infrastructure spending is one of the biggest drivers of growth in India.


Consumption is also a crucial part of the India growth story, as it accounts for close to 70 percent of GDP. The biggest advantage from the new bill for Indian consumers, is a reduction in the overall taxburden on goods. This will result in more money in the pockets of Indians to purchase consumer products.


As previously mentioned, the passing of the GST law is sure to entice international investors to ramp up their operations in the country and this goes hand-in-hand with the current administration’s ‘Make in India’ initiative. By subsuming all previous taxes, the GST bill is removing a deterrent of ‘Make in India’.

 

Lastly, the new tax reform will ease fiscal management for government. Taxes will be difficult to evade under the new system, as they will be self-enforcing and self-collecting, similar to Harmonized Sales Tax (HST) in Canada.


Excel Funds Offers Unique Access to Investment Opportunities in India


Investors should see this largely as a historic achievement, especially in a multiparty democracy such as India. Overall, it is a major win for the Narendra Modi government and a positive for the economy, which is expected to boost long-term growth, and that is what investors in India are ultimately looking for. The passing of the GST reform demonstrates progress in what is already one of the shining lights in the emerging markets;and for investors looking to capitalize on the projected growth, Excel Funds offers a broad range of solutions.

Excel Funds has a longstanding track record of successfully investing in India, dating back to 1998, and the launch of the Excel India Fund, which is currently the largest and longest-running India-focused mutual fund in Canada. The Excel India Fund is also winner of the 2015 Lipper® Fund Award for Best Fund over 3 years, in the Geographic Equity category. Additionally, Excel Funds expanded its lineup of India-focused investment strategies earlier this year with the launch of the Excel India Balanced Fund and Excel New India Leaders Fund. The two new funds will be actively managed by Aditya Birla Sun Life Asset Management Company Pte. Limited, a wholly owned subsidiary of Birla Sun Life Asset Management Company Limited, which is one of the largest and most respected fund managers in India, with approximately US$20 billion in assets under management, as of March 31, 2015.



“The GST reform is rightly being labeled as a real ‘gamechanger’ for India. It is a positive sentiment for investors and the overall market,” says Bhim D. Asdhir, President and Chief Executive Officer of Excel Funds. “Mr. Narendra Modi and his administration have shown that they are capable of implementing historic changes and we expect this decision to take India’s growth to the next level. At Excel Funds, we are happy to offer investors access to these unique opportunities and strongly believe that now is the time to capitalize.”

 

¹ Bloomberg Business, What’s The Big Deal About India’s Goods and Services Tax? Q&A, August 2, 2016.
² Zee News, How GST will benefit Indian economy, July 18, 2016.
³ World Bank data, accessed on July 19, 2016.
⁴ Trading Economics data, accessed on July 28, 2016. Fiscal year 2015-16.

Excel India Fund, Series A was awarded a 2015 Lipper Fund Award in the Geographic Equity category for the 3-year and 10-year periods ending July 31, 2015 out of a total of 12. The Lipper Fund Awards, granted annually, are part of the Thomson Reuters Awards for Excellence awarded by Lipper, Inc. and highlight funds that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The Lipper Fund Awards are based on the Lipper Ratings for Consistent Return, which is a risk-adjusted performance measure calculated over 36, 60 and 120 month periods. The highest 20% of funds in each category are named Lipper Leaders for Consistent Return and receive a score of 5, the next 20% receive a score of 4, the middle 20% are scored 3, the next 20% are scored 2 and the lowest 20% are scored 1. The highest Lipper Leader for Consistent Return in each category wins the Lipper Fund Award. Lipper Leader ratings change monthly. For more information, see www.lipperweb.com. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper.

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