How a fretting consumer spending will be affected by GST tax narrative in India
New Delhi,June29:This article intends to analyse the impact of upcoming Goods and Services Tax (GST) on consumers. But before we proceed further let’s understand where a consumer is placed in the GST chain and how it will get impacted.The consumer-narrative of GST hinges upon the most complicated and experimental process of input tax credit. With input tax credit, GST is supposed to tackle one of the major distortions of the current tax structure, that is, the cascading effect of taxes.
While the lower Goods and Services Tax (GST) rates may lead to a decline in inflation, economic growth may not improve significantly in the short term even though it will benefit both India Inc and the government in the medium term, experts say.
Post-GST implementation, manufacturers can claim tax refund on the inputs to the final product. They will pay tax only on the value (output) they added to the product and will be credited with the amount of tax they already paid on inputs.
A consumer might not be required to do anything under GST, and is also the last person in the value chain involving supply of goods and services, but all this tax transformation is undertaken for his betterment only.
There is an interrelationship between a consumer, business and indirect taxes. One of the leading revenue generators to the government is indirect taxes, a tax that is collected and deposited by a business, but eventually passed on to the person who bears the ultimate economic burden of the tax (i.e., the consumer). The price paid by a consumer for goods and services have following three unnoticed components (other than market forces that are governed by various external factors):-
|S.No.||Element in price||Controlled by|
|1||Cost of inputs/raw material||Largely depends on business decisions, what to procure, from where and of which quality. Indirect taxes play a limited role here, as the inputs or raw material will also have an indirect tax levied on them|
|2||Profit margin||Solely a business decision|
|3||Taxes||Solely governed by applicable scheme of taxes on such products, services or industry|
A change in any of the above components will certainly birth a variation in price of goods and services. Aside the profit margin and quality-related decisions, from a tax perspective implementation of GST (amalgamation of existing indirect taxes and cesses) will have a critical role in price determination.
Now, when we have captured the significance of indirect taxes in pricing of commodities, we progress to list down the impact of GST on consumers. India’s larger consumer base is a price elastic consumer, and any change in the price leads to demand and consumption volatility. Few of the key impacts of GST on consumers could be as follows:-
Impact of GST on consumers
- Reduction in price of goods and services, how?
The present scheme of indirect tax results in cascading effect of taxes, and thus in certain scenarios the taxes paid on procurements are not available for setting off the output tax liability. This leads to formation of a tax cost and rise in price of the commodities. The GST implementation is expected to curb this cascading effect, and provide a seamless credit to the supplier of goods and or services. In turn, there will only be a tax on value addition and no business costs in terms of taxes paid on procurement of inputs, input services, or raw material.
Thus the net amount of indirect taxes implanted in the value chain will be less, thus price of goods and services will be expected to be relatively less in ordinary scenario. Due to incorporation of anti-profiteering provisions, businesses will be bound to pass the benefits (on account of GST implementation) to the consumers. The final announcement on fitment of commodities into proposed multi-tier rate structure along with tax rate for services will happen next month (May), post which one will be able to sense the real reduction or inflation in prices.
- Uniform prices throughout the country
Today, we have Value Added Tax (VAT), which is levied on sale of goods and administered at state level. Under the VAT laws, there are Schedules which outlines the tax rate on commodities with their brief description. This description and fitment may vary from state to state which leads to price variation. Besides this, there are certain local taxes and duties (such as entry tax) which are levied only in identified states. With GST coming in, all these complexities will be ironed out, and there will be uniform prices across nation. Implementation of GST is most commonly echoed as ‘one nation, one tax, one market’.
3.Certain goods to be costlier in the name of cess, and service will be taxed at a higher rate
GST will have minimum exemptions. The existing benefits will be grandfathered under GST only where necessary and it is expected that few of the exemptions and tax holidays will be put in their sunset mode. Removal of such benefits, may burn a hole in the pocket of consumers as they have to bear an economic burden of tax cost (GST), which businesses will pass through to them. Further, the government has introduced a levy of cess on certain goods (tobacco products, coal, aerated water, motor cars), to be commonly be known as ‘compensation cess’. This charge of additional ‘cess’ will make these goods costlier than the existing prices. Also the services are expected to be costlier by three percent, and the rate under GST may increase to 18 percent.
4.Better accessibility of goods and services
The implementation of GST will provide numerous business opportunities to decide on warehousing and logistics. It is expected that there will be a better accessibility of goods and services under GST, as the consumer need not travel across states for making a purchase to save tax. Further, the online shopping companies will plan their operations to reduce the lead time, while managing the warehousing facilities, which today are contingent on filling complexities of present tax structure.
As a consumer, one is eagerly waiting for announcement of tax rates and proposed list of exemptions. Using which, he will apply a gross mathematics and decide on his major purchases during this transition period. Say, motor cars are expected to be expensive in GST, a consumer will look forward to buying the same before GST kicks in. Indirect taxes will follow the consumer, no matter in what name and shape, and he (consumer) will have an inevitable encounter with them as an essential element in price of goods and services. What an informed consumer can do is be aware of applicable taxes on his purchase.
This, of course, is a phenomenal reform. However, the benefits of this process will remain in the realm of presumption till GST sets in. The pro-consumer premise of GST is based on the supposition that GST will reduce the cost of business via tax refunds and benefit will eventually make goods and services cheaper.
However, this hypothesis of GST comes with three big ifs.
1. Neither the government nor the industry has any idea how much saving the input tax credit will generate for various producers and service providers.
2. The government is still grappling with the primary challenges of assesses migration and registration. The refund process is still a far cry.
3. Initially, the cost of GST compliance may offset substantial gains businesses may accrue via input tax credit.
4. Even if one assumes that GST will generate healthy savings to the businesses, the consumer will get the benefit only when the government reduces the rate of taxes. The government is unlikely to cut already high GST rates in the near term owing to the fact that transformation will be a revenue dampener.
Although the government has brought in anti-profiteering measures to ensure that manufacturers and dealers do not hoard unreasonable profits and pass on the tax benefits to the consumers, the process of anti-profiteering would not start by design. It will begin only with the receipt of an application along with evidence.
In other words, the poor consumers will have to take on the nearly impossible task of challenging and establishing the case of profiteering before the designated authority.Second, the process of hearing, investigation, and return of undue profit to the consumer is highly bureaucratic and cumbersome.
Ignoring these facts, if any enthusiastic consumer genuinely prefers to be a part of the GST history, he can try his luck with the government on the following points.
1. The government must come out with detailed sector-wise research on the benefits and savings likely to be generated through the refund of input taxes.
2. How does the government intend to ensure transparent reporting of GST benefits by the companies?
3. The government must share data on the compliance costs for various sizes of businesses.
4. How will the reduction in tax rates after GST factor in its benefits to the industry?