Indirect taxes are built into the costs of goods and services, which silently hit the ultimate consumers through their spends on consumables, durables and services. When we buy a tube of toothpaste or pick up a can of Pepsi, we do not stop to ponder on how much is the value of the product and how much is the quantum of indirect tax. As the goods and services tax (GST), a major makeover of Indian indirect taxes, is now just a step away, it is worthwhile to look at how it would affect the common man.
It is envisaged that the retail sales price based mechanism of payment of excise duty, applicable for most of the consumer goods, will be discontinued in the GST. This is expected to remove the cascading effect of central and state taxes on manufacture. In addition, the excise duty which was otherwise levied on final MRP of packaged goods irrespective of cost of production will also be replaced by a single GST leviable only on value added at each stage of supply.
A directional analysis shows that this is likely to reduce the incidence of indirect taxes on goods of daily use and white goods, and bring down the market prices for such goods by around 7% to 9%.
Further, a uniform GST rate across the country, would enable elimination of the tax differences between states, thereby leading to a common market across the country. This will provide businesses opportunities for altering their sourcing patterns, which can translate into reduced logistic costs and taxes associated with the transportation and procurement.
Largely the valuation of goods under GST would be market driven and tax efficiencies of businesses will play a role in reducing the price for the ultimate consumer. There is a high likelihood for aligned price structures of tax efficient manufacturers who would be driven to pass on the highest benefits to the consumers and this could result in downsizing the gray markets of products of such manufacturers.
However, one has to bear in mind that if the percentage benefits to businesses are not proportionate to the percentage increase in indirect taxes in form of GST e.g. telecommunication service providers are not allowed credits on heavily expended capital goods and their benefits i.e. growth in input tax credits increase by 1%-2% as against increase in indirect tax (GST) of 4%, it is likely that final prices of some goods and services may increase in the hands of consumer. Similarly, if abatements on services as currently prescribed do not continue under GST, the prices for such services to the consumer are likely to rise. In such a scenario, the government will have to consider alternative mechanisms for stabilising the prices of some goods and services and avoid an inflationary impact.
A rational GST system for India would be that of enabling the ultimate consumer to cherish the benefits of simplified taxes and thereby controlling the ever-growing inflation in prices. However, much is also dependent on the type of supplies and approach of industry segments in passing on the benefits of reduced taxes to consumers. This would also be influenced by competitive forces in each industry. Hence, while GST would largely be a blessing for consumers, it is essential for the government to have regulations which compel manufacturers to pass on the benefits of lower taxes to consumers. Countries such as Malaysia, which have introduced GST last year, have ensured that anti-profiteering provisions are part of the GST legislation and we would also do well to take some lessons from the same.
The writers are with Deloitte Haskins & Sells LLP