9 August 2016
The tax bill that just made investing in India more exciting
By Ryan Lightfoot-Brown, research analyst
India is my favourite emerging market. The demographics are great: a young, increasingly educated population and growing middle classes. It is also a very entrepreneurial society with workers wanting to work hard, so the opportunities for business and growth are great. This has been stifled in the past by a having a very messy democracy.
However, Modi, the pro-business prime minister, has done a lot to address this and, on 3rd August 2016, there was a historic breakthrough. The much-anticipated and debated Goods and Services Tax (GST) Constitutional Amendment Bill was passed unanimously in the Upper House of the Indian Parliament.
The single most important structural reform in 25 years
This bill is important because it will replace a plethora of central, state, inter-state and local taxes with a single, uniform tax for good and services, effectively making India one unified common market.
Usually it's hard to get excited about taxes but, according to the team behind the Elite Rated Goldman Sachs India Equity Portfolio fund, this bill has the potential to be the single most important structural reform in India since the early 1990s.
At the moment, the tax laws are unnecessarily complicated, arbitrary and discretionary, and business owners can spend an extraordinary amount of time complying with them. In theory, their time will now be freed up to do what they want to do: conduct business with ease, certainty and efficiency; increase productivity; and give India's companies a competitive boost on the global stage.
With China slowing, the world is looking to India to take up the reigns and this bill will certainly help.
A fly in the ointment
A potential fly in the ointment, however, is the upcoming retirement of Raghuram Rajan, the globally respected governor of the Bank of India, and question marks over who will replace him. In many people's eyes, Rajan is regarded as the best central banker in the world. He has effectively managed inflation, foreign exchange reserves are near record levels and problematic loans in the banking system have been addressed in his three-year term. Lowering interest rates more slowly than the government would have liked didn't go down well in political circles, but he prevented the economy from overheating.
Global markets have become addicted to central bank stimulus in recent years and India would be no exception, so while the stock market may welcome the prospect of interest rate cuts from the new governor, it could very well unsettle Rajan's good work. We wait with a trepidatious eye.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Ryan's views are his own and do not constitute financial advice.