By Abhishek Jain, Tax Partner, EY India
The ambitious goods and services tax (GST) may be a reality soon. GST will de-shackle India of its complex indirect tax structure and enable a single unified indirect tax structure subsuming majority of the indirect taxes in India, which will reshape the India’s indirect tax structure.
Economists and tax experts see it as the biggest tax reform in independent India. But what does it mean for a common man? In this article, we strive to achieve better understanding of the impact that the GST will have on key sectors of the Indian economy and ripple effect of the same on ultimate customers.
Let me start by saying that from an indirect tax cost perspective, GST will not have a uniform impact on all sectors, given that under the current regime the indirect tax cost is very different for different sectors.
Tax cost on ‘goods’
The indirect tax cost on most goods is currently on the higher side. This is for the reason that most goods (for e.g. beauty products, most consumer electronics, non-luxury automobiles) attract an excise duty of 12.5% and a VAT of 12.5% to 15% depending on the State. Further, there are numerous cascading of taxes on account of levy of CST, input tax credit retention under the VAT laws, levy of entry tax/ Octroi/ local body tax, etc till the time the product reaches the end customer.
A combined effect of the same leads to an effective indirect tax rate 25% to 30% in the hands of the end customer. If the standard rate of GST is 18%, then for most goods there would be a significant reduction in the overall indirect tax cost. This reduction in indirect tax cost can lead to reduction in production cost and increase in base line profits, giving headroom for reducing prices and benefiting end-users.
However, for some other goods (for e.g. textiles, edible oil, low value footwear) the rate of excise duty is nil whereas VAT in most States is 5%. Thus, the overall tax cost for these kind of goods (after factoring the non-creditable taxes) is about 8 to 9%. If these goods are kept at the standard GST rate of 18% then there would be significant increase in cost for the end customers. Even if these goods are kept at the lower GST rate of 12% there would be an increase in cost for the end customers.
Tax cost on services
The indirect tax rate on services is 15% currently. In GST this rate may go upto 18%. For a business customer, this GST would be creditable and hence would not result in increase in cost.
For an end customer, on the face of it there appears to be an increase in indirect tax cost. However, on a closer analysis, what comes out is that today (for e.g. telecom services) there is 15% tax cost on the output side plus there are whole lot of non-creditable taxes on the procurement side for eg VAT / CST paid on all the goods (for eg the telecom towers, networking equipment, etc) that this industry purchases to render the services. In GST though the output tax would increase from 15% today to a GST of 18%, but all the non-creditable taxes on the procurement side today would become creditable which should largely annul the increase tax rate on the output side.
Thus, if the service providers pass on the benefit of larger credits to the end customers by reducing the prices/tariffs, there should not be an overall increase in cost for the end customers.
E-commerce – the dark horse
The roll out of GST would lead to onerous compliance for e- commerce industry; however following benefits would arise upon the implementation:
- Cascading taxes: The GST model would facilitate seamless credit across supply chains, with tax set offs available across the production value-chain, both for goods and services. This will result in reduction of cascading effect of taxes, therefore bringing down the overall cost of supplies
- Consolidated tax rates: Currently, there are differential rates of VAT for the same goods in different States with further fragmentism of VAT rates and levy of entry tax in certain states. This has in the past resulted in classification disputes and entry tax litigations. However, with abolition of entry tax in GST and given that GST rates at both the Central and State level are expected to be uniform and harmonised, the same is likely to bring down the disputes.
There is no doubt that India Inc. will benefit from the roll out of GST; however, the gains for the ‘aam aadmi’ (common man) are still wrapped in conjecture. Whether GST will be the trigger point for ‘ache din’ (good days) for common man; only time will reveal.
When Australia introduced GST in 2000, the Government had set up a commission to protect the interests of consumers. The commission monitored prices to ensure that consumers got full benefits from the reduction in tax rates. If the tax rate went up, it ensured that consumers were not charged more than what was necessary.
Considering the political scenario in India following the initiative of Australia appears unlikely. However, we can hope that in India the competitive dynamics would only discipline pricing decisions.
(Views expressed are personal)