Prime Minister Narendra Modi announced changes in the GST structure in his August 15 speech, which had a direct impact on the stock market. On August 18, both Sensex and Nifty registered a gain of about 1.5 percent. PM Modi indicated that the new GST structure could be implemented by Diwali, which is expected to provide relief to both common consumers and the industry.
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Which tax slabs will remain
According to the new plan of the government, the 5 percent and 18 percent slabs of GST will remain, while the 12 percent and 28 percent slabs are likely to be abolished. This change will have a direct positive impact on vehicles, two-wheelers, and FMCG companies. Also, a proposal has been made to reduce the GST rate on health insurance premiums from 18 percent to zero.
Tax on sin goods and its impact on GDP
However, the tax rate on tobacco, luxury cars, and other sin goods can be increased to 40 percent. The government believes that this step will increase consumption and create a positive environment in the economy. According to experts, this reform can increase the country’s GDP growth rate by up to 0.6 percent.
Opportunity for thematic fund investors
Experts believe that the performance of consumption-themed mutual funds can improve due to increased consumer spending. Rajesh Minocha, founder of Financial Radiance, said that the reduction in tax rates will increase consumption, which will benefit companies in the auto, FMCG, and consumer discretionary sectors. Consumption-themed funds can prove to be good options for investment in the short and medium term, although the risk is also high in them.
Possible boom in the auto sector
At present, apart from 28 percent GST on passenger vehicles, an additional cess of 1 to 22 percent is levied depending on the engine and body type. This takes the total tax to 50 percent. If the GST rate is reduced to 18 percent in the new system, then the prices of cars and two-wheelers will fall drastically, and demand will increase.
Benefit to FMCG and durables companies
Experts believe that everyday products like butter, ghee, snacks, and noodles can become cheaper. This will increase the sales and volumes of companies like Nestle, Hindustan Unilever, Bikaji, and Gopal Snacks. On the other hand, reducing GST on air conditioners and large TVs from 28 to 18 percent can reduce prices by 8 to 10 percent. This is likely to increase demand during the festive season.
Wisdom is important for investors
Experts have advised that investors should invest only 5 to 10 percent of their portfolio in thematic funds and choose diversified funds like flexi-cap for the long term. Instead of chasing short-term trends, it would be better to invest while keeping in mind financial goals, investment period, and risk-taking capacity.
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Golden opportunity for consumption funds
GST reform can give new impetus to the auto, FMCG, consumer durables, and insurance sectors. Products like consumption-based thematic funds and the Nifty India Consumption Index can provide attractive opportunities to investors. However, it will be safer for investors to adopt a diversified approach.