Learnings From Foreign Bourses Post GST Implementation

The new Goods and Service Tax (GST) regime in India is applicable from July 1, 2017. The uncertainty in transition to the new regime is making businessmen, taxmen and companies jittery. Investors and businesses do not like uncertainties in regulations, but changes are inevitable and, sooner or later, issues settle down. 

Since 2000, three countries have implemented GST. These are Australia, Canada and Malaysia. These countries would have faced similar challenges in implementation, inflation, cash flow issues, stock out situations, decrease in growth rates, etc. India also has its own set of issues relating to implementation, such as lack of preparedness amongst traders, excessive documentation and lack of clarity. Traders from various industries like textile, foodgrains, spices, diamond, dry fruit, etc. held a strike protesting against GST. On other hand, exporters of goods and services from India are also worried about delays in tax credit impacting liquidity and increasing the cost of working capital funds. All these teething troubles are likely to have a short-term impact on performance of the Indian stock market. Thus, in the present study, we are focusing on measuring the performance of stock indices of those countries that have implemented GST. We have calculated the quarterly index returns for benchmark indices of each of these countries pre- and post implementation of GST. The findings would help us understand how Indian stock markets are likely to behave after GST implementation. 

Markets are forward looking and a decrease in second quarter (July-Sept.) earnings due to glitches in GST implementation are likely to result in a decrease in share prices, thus leading to fall in indices. For this study, we have considered S&P ASX 200 for Australia, S&P/TSX Composite index of Canada and FTSE Bursa for Malaysia. We obtained daily values of these indices and calculated quarterly returns of these indices. 

In Table-1, we can clearly see that across all the three countries, the stock market indices have generated negative returns in the quarter when GST was implemented. In the first quarter after implementation, Canada has recovered, whereas the Australian and Malaysian markets fell. Abnormal fall of -18% of the Canadian index in Q -2 can be associated more with the Lehman crisis where indices around the globe tumbled. 

The key learning from GST implementation in other countries strongly suggests that investors in India should prepare themselves for a correction in the short-term. Retail investors should avoid investing for short term profits. In the longer term, relentless efforts by GST committee, Central Board of Indirect Taxes and Customs (CBIC), professional bodies like ICAI and other indirect tax machinery are sure to reap results. The long term growth story of India still looks promising. 

Dr. Ruzbeh J Bodhanwala, Professor, FLAME University, ruzbeh.bodhanwala@flame.edu.in n CA. Shernaz Bodhanwala, Asst. Professor, FLAME University, Shernaz.bodhanwala@flame.edu.in