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India To Unify Tax: Near-Term Pain/Long-Term Gain For ETFs

Jul. 04, 2017 8:10 AM ETINDY, PIN, INDA2 Comments
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Originally published on June 3, 2017

Markets in India have put up a solid show so far this year on a buoyant economy. Continuing the upbeat momentum, India is now set to launch the goods and services tax or GST from July 1 for the first time since independence. This tax will fill in for/unite more than a dozen of indirect taxes levied by state and central governments. The initiative is aimed at beefing up government revenues.

Why is GST So Important?

The move is expected to create seamless business transaction, lower cost of production of goods and reduce inflation - an economic issue that India normally grapples with.

As per the source, India presently has one of the worst tax-to-GDP ratios of 16.6% among key economies, less than half the OECD average of 34% and also below that of several emerging economies. But with the implementation of GST, which is one of the highest in emerging economies, India will come out of that issue.

The government estimates that companies would be able to save around $14 billion under the GST scheme, as the tax system "will allow them to organize their warehouses and supply chains more efficiently."

As per IMF, GST will drive India's medium-term growth to above 8%, while some analysts expect the implementation of GST to boost GDP by 1.5-2% over the long term.

Is It a Near-Term Pain and Long-Term Gain?

Apart from the bullish ones, there are other views as well. Citigroup Inc.'s economists last year analyzed "that countries like Canada, Australia and New Zealand saw a one-time increase in inflation after GST implementation, which normalized in a year." This pattern can be considered as a short-term negative.

Moreover, some weakness in the corporate earnings from GST may be noticed in the second quarter, due to the

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Comments (2)

johndoe1400 profile picture
CORRECTION TO MY PREVIOUS MESSAGE - I was referring to local (Indian ETF's and stocks) purchased in India. Mike
johndoe1400 profile picture
As far as I am aware, capital gains on ETF's are taxable at a higher rate than individual stocks. Also, long term (1year+1day) capital gains on stocks are ZERO, but capital gains on ETF'S are still taxable. This info was given to me a couple of years ago and might have changed since. Mike
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