No words sound truer in fiscal policy than Edmund Burke’s declaration that ‘to tax and to please, is as impossible as to love and to be wise’. Nevertheless, as representatives of the GST Council met recently to fix rates for each of the goods and services, anxiety mixed with excitement accompanied the proceedings. Certain key sectors such as FMCG rallied, given the prospect of lower rates. The devil, of course, is in the details—some other sectors were left with a mixed bag of sorts.
The automotive sector has been hit recently with the double whammy of the infrastructure cess (announced in the 2016 Budget) and the fallout of dipping sales following demonetisation. Undoubtedly, the announcement that cars would be uniformly taxed at 28% will not be welcome news for the industry. Adding to the burden, car buyers will also have to pay a compensation cess—ranging anywhere from 1% to 15%, pegged to the size of the car sold. This would lead to an uptick in prices.
The underlying intention of the government may be to incentivise a shift in demand from private to public transportation. This is laudable, but appears unworkable in the short- and medium-term. A growing middle-class and an unduly long gestation period in building a comprehensive public transport system will lead to a surge in demand for cars. There is an unavoidable requirement for better infrastructure, which necessitates an impetus to the infrastructure sector itself.
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With the government reining in spending, the onus will be on private investment to fill in the void for essential infrastructure expansion. Oddly enough, the announcement of a 28% tax on construction equipment could be a rude shock to the sector. Contractors undertaking projects on Build-Operate-Transfer (BOT) basis may be turned off by the upfront capital outflow caused by the enhanced rate.
Another setback for urban consumers is the 28% slot for consumer durables such as ACs, washing machines and the like. While this is arithmetically close to the present tax rate, consumers were assured of a more favourable tax dispensation considering these ‘white goods’ have now become fixtures of common households. Promises not being met may act as a dampener on consumer sentiment. Perhaps, this will be offset in the long-term by the accrual of supply-chain efficiencies and robust market dynamics. However, in the interim, consumers will have to take the hit. Some cheer may be got from the fact that FMCG goods (including toothpastes, soaps, etc) are taxable at the standard rate of 18%. This, of course, was no easy step given FMCG products are prime revenue generators.
While the GST Council has deftly resisted lobbying thus far, the deferment of rates for readymade garments, footwear and gold to the Council meeting today points to the daunting task ahead. Garments currently suffer a cumulative tax burden of roughly 8-9%. The Council’s acumen will clearly be tested, when it attempts to gauge which bracket these may be slotted in. A 5% rate could lead to revenue loss, while a 12% rate could be slightly expensive for the customer. Any higher rate may lead to runaway inflation, burdening a crowded and employment-generating industry. Similarly, too high a rate on gold may lead to a resurgence in the black economy.
The rate for services poses several challenges. In substance, most services have been pegged at 18%. However, the ramifications for consumer-centric services such as hotels, air travel, etc, are hard to foresee, owing to multiplicity of rates for different categories of customers.
Indeed, these challenges reveal the difficulty in finding a middle ground when it comes to rate fixation. While it is easy to find fault on specific issues, on the whole, the final rates appear to be a clever balancing act. The negotiations surrounding GST have so far proceeded on a spirit of ‘give and take’, and it is impractical, if not impossible, to account for every demand. A sharp socialist streak dividing commodities between the aam aadmi and the amir aadmi appears to be a necessary evil in consensus building.
The remaining rates, to be announced in the last leg, will be decisive in determining public sentiment regarding GST. Expect all the bureaucratic jugglery and political maneuvering to be on full display.
While the government is proceeding at breakneck speed to meet the July 1 deadline, some caution in setting the critical pieces in place would be advisable. With care, the GST rates may not reflect the ‘perfect GST’, but could very reflect a ‘pro-effect’ GST. As always, the last over is all that matters. Hopefully, it will finally call for a hi-five!
The author, Praveen William, is a partner (Indirect Tax) in KPMG India