BackGST: striking a balance
Various products such as food grains, essential medicines, fruits, vegetables and others may fall under the bracket of nil tax
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The Goods and Service Tax (GST) in India would be a unified, multi-stage, consumption-based value-added tax (VAT). Thus, subsuming the existing multiple indirect taxes and cesses. For a common man, the key area of interest revolves around the price of products and services that she would use. But the questions in people’s minds are: would GST lead to inflation and what would be the tax rate applied on goods and services?
Rate of tax
In November 2016, the GST Council recommended a rate structure for goods.
• 28% is the highest rate for luxury goods, sin or demerit goods, with an additional levy of cess.
• 18% standard rate may also include goods increasingly used by common households.
• 12% is the standard concessional rate of tax.
• 5% rate includes goods of mass consumption such as essential commodities.
• Those with nil tax include about 50% goods in the consumer price index.
• No specific rate has been prescribed for services .
Various products such as food grains, essential medicines, fruits, vegetables and others may fall under the bracket of nil tax. Goods of mass consumption used by common people may be charged at 5%. Also, various goods whose current total tax incidence is 9-15% may be levied a 12% GST. However, there is a possibility that a few products that today attract 15-21% may fall under the bracket of 18% GST and some such goods may be used by common households. So, the goods used by the common man may not have a high GST tax incidence. But for services, the rate may increase to 18% from 15%.
Price of goods and services
The next important factor is the price of goods and services under the GST scheme.
Before analysing this, let us understand a few objectives behind the introduction of GST. One is to abolish the cascading effect of taxes, as prevailing in the current indirect tax structure. The biggest deficiency of today’s indirect tax law is ossue of the tax on tax. For example, when goods are manufactured, excise duty is levied. Thereafter, when manufactured goods are sold, VAT is charged over and above the excise component. Second is the non-availability of credit for all the expenses incurred. Under the GST law, almost all expenses incurred for furtherance of business would be available as credit. The design of GST may itself allow embedded tax cost to be removed from the value chain. Ideally, this should lead to reduction in prices. To ensure that benefits of GST are indeed passed on to the end consumers, the government has brought in anti-profiteering provisions. As the design of the GST may result in improved profit margins at every stage of the value chain (i.e., low tax rates or more credits), the government is mustering all the provisions to prevent price abuse. This would consequentially bring down prices of various goods and services of routine consumption.
The anti-profiteering provisions, albeit in the form of motherhood statements, incorporated in the present draft legislation provide for the constitution of an authority to examine whether any input tax credits availed by a registered taxable person or the reduction in price on account of reduction in tax rates under GST, have actually resulted in commensurate reduction in prices of the said goods and services. The government wants the industry to maintain status-quo on profits against the introduction of GST, and also expects the industry to be an honest conduit in passing benefits to consumers. The definition of a ‘common man’ from the GST perspective has two dimensions: the consumer base, and the small-scale trader or retailer base. While consumers are expected to benefit under GST, small traders would be in the throes of compliances regarding anti-profiteering provisions.
Learning from international experiences of such anti-profiteering implementation, where countries like Malaysia and Australia did not receive the expected participation from the industry in the initial years, the government needs to come out with a well-thought-through regulation. The proposed authority to examine commensurate reduction in prices of goods and services, would have functions and powers to levy penalty if it finds that prices have not been reduced in accordance. One, however, needs to see how such a penalty would benefit consumers who have already been overcharged. By and large, GST implementation in India is likely to witness a reduction in prices of commodities of mass consumption and public utility. To compensate for revenue loss, a few identified goods, including those hazardous to health and items of luxury, would have a tax rate as high at 28% along with an additional levy of cess.
Inflation
For a common man, another area of concern would be inflation. It has been noticed that in countries with GST, there was an initial spike in inflation. In Australia, the impact of one-time increase in inflation post-GST implementation was normalized within a year. In Malaysia, which introduced GST in April 2015, GST contributed only 0.7 percentage points to inflation in 2015. The second half of 2015 saw some increase as firms that had initially absorbed GST started to pass it on to customers.
The frequently asked questions (FAQs) released by the Ministry of Finance on 3 August 2016 indicated that the consumers will benefit under GST. India’s GST needs to withstand the test of time, before calling itself a consumer and common man friendly regulation.
Anita Rastogi, partner, PwC and Preetam Singh, consultant, PwC.
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