Tax Talk: GST – Impact on goods may be less than services

With the passage of the Goods and Services Tax (GST) Constitutional Amendment Bill in both the Houses of Parliament, the most awaited indirect tax reform is set to become a reality.

It will subsume majority of the indirect taxes and reduce the cascading effect of taxes in the supply chain.The government is making efforts to roll out GST by April 1, 2017.

Impact on consumption of services

The standard rate of tax under the GST regime is expected to be around 18%. Under the current regime, services are taxed at 15% (inclusive of cesses). Effectively, for the consumer, this would mean paying higher taxes on the services consumed by him.

The collective impact of the increase in the tax rate under the GST will be on air travel, telephone and broadband use, restaurant bills, dry-cleaning, courier, cost of engaging lawyers/chartered accountants, beauty treatments, cable and DTH services, hiring taxis, etc would be significant for a consumer.

The cost of financial services such as loan processing charges, credit and debit card bills etc. are expected go up due to the higher GST rate. Higher GST rate would also have an impact on life insurance premium, thereby making insurance policies costlier.

At the same time it is also expected that essential services like health, education, etc. may attract GST at a lower rate of 12% as opposed to the standard rate of 18%, thereby easing off the burden on the consumer’s strained pocket.

Impact on consumption of goods

At present, goods typically attract excise duty at 12.5% as well as VAT/ CST between 5%-15%, which is ultimately passed on to the consumers.

Under the GST regime, both VAT and excise duty would be subsumed while the standard rate of GST is proposed to be capped at 18%. Given the same, the levy on manufactured goods is expected to go down thereby significantly reducing the prices of consumer durables, electronics items, readymade garments, FMCG products, etc.

Further, certain goods like small cars (which presently attract an excise duty of 8%) are likely to see an increase in prices on account of GST, while the prices are likely to drop for luxury cars (which presently attract an excise duty of 27 to 30%).

Under the present regime, electricity attracts electricity duty which has not been subsumed under GST and would continue to be payable on supply of electricity.

After the implementation of GST, electricity companies would not be able to take credit of GST paid on ‘inputs’ as is the case under the present regime.

However, the rate of tax under GST regime might be higher than the current rate of taxes applicable on ‘inputs’ for electricity companies. Thereby, such companies might face losses in shorter run, which would be compensated by price rise in near future to be ultimately borne by the consumers, thus increasing household budgets.

Till such time that the GST legislation as well as the rate structure are finalised, its impact on the consumer is a matter of speculation. While the cost of manufactured goods is expected to come down, the cost of services is expected to increase.

The writer is managing partner Nangia & Co. Inputs from Tanushree Roy, senior manager, Nangia & Co.