In fact: Expect both goods and services to cost more initially


Currently, goods attract an effective tax rate of 24-25 per cent (including both the central and state levies), while services attract a levy of 14.5 per cent. –

The Goods and Services Tax (GST), stuck for the lack of an understanding between the government and opposition, is supposed to be the “biggest tax reform since Independence”. How will it impact stakeholders?

The entire ecosystem in which businesses operate, including traders, retailers, consuming states, producing states and end consumers, is likely to be impacted. Being a destination-based tax, rollout of the GST would mean greater revenues for states where goods are headed, that is, consuming states. Producer states will see a moderation in their revenues as a result of the shift in the tax regime, which is currently origin-based; however, they will gain from increased economic activity and taxation of services. Services are at present taxed by only the Centre.

 Impact studies carried out in countries that have implemented the GST or its equivalents indicate that the first year of implementation is likely to be inflationary, with a surge in prices of both goods and services.

Chief Economic Adviser (CEA) Arvind Subramanian has argued that while in principle, the GST should have no aggregate impact on inflation and price levels because the new rate will be revenue-neutral, the impact on particular goods and services will depend on the current structure of taxation.

In his report on revenue-neutral rates, the CEA has suggested a standard GST rate of 17-19 per cent for both goods and services, a low rate of 12 per cent for goods, and a high rate of 40 per cent for luxury goods. Spelling out scenarios based on these rate structures, the report of the government-appointed panel points out that while the exact impact on inflation can be worked out only after the GST rate is finalised, a lot would depend on factors including which goods and services the government wants to exempt from the proposed tax, whether producers pass on the benefits of tax credit to consumers, and the effectiveness of the system monitoring the impact of the GST on prices. But as the GST inches towards reality, experts are clear that the way the proposal has been structured (that is, excluding heavily taxed items like petrol and alcohol) consumers should be ready to pay more — marginally in some cases, significantly in others. Currently, goods attract an effective tax rate of 24-25 per cent (including both the central and state levies), while services attract a levy of 14.5 per cent. Increase in prices of goods will vary depending on the type of product, and the list it is placed in, experts say, emphasising that while the first year will be inflationary, subsequent years would be better with the increased prices becoming the new normal. Under the current tax system, items like food and beverages, and clothing, are either exempt from tax, or taxed at low rates. According to the report, 75 per cent of items in the Consumer Price Index are exempt from excise; 47 per cent are exempt from sales tax. The CPI basket includes eggs, fish and meat, spices, non-alcoholic beverages, fruits, fuel and light, clothing, footwear, medical care, stationery, recreation and amusement, and personal care items, among others. Most states have already decided to have a dual rate structure for GST — a low rate for some commodities, and a standard rate for others. If the government cleans up the exemption list, goods that are currently exempt will attract GST. Agricultural products, for example, which are exempt from taxes currently, may attract GST if the government decides to prune the exemption list. According to official sources, the government is planning to trim the exemption list for excise from the current 300 items to only around 99. Though which items exactly are not yet in the public domain, the panel has made a case for doing away with exemptions on education, health, and electricity. The government is however, likely to carefully weigh the big political risk this will entail. As per government data, excise tax exemptions and taxing goods at low rates result in foregone revenues of Rs 1.8 lakh crore for the Centre, and about Rs 1.5 lakh crore for states. India loses about 2.7 per cent of its GDP because of exemptions. Services are expected to feel the biggest pinch, with the cost of services including telecom, banking, eating out and visiting salons rising. It is to be noted that services comprise around 60 per cent of India’s GDP. Retailers and traders will benefit from being able to avail of the credit for service tax paid. The new indirect tax regime aims at doing away with the cascade effect of multiple taxes at the central and state levels, while giving credit for taxes paid at various stages for both goods and services. Now with the availability of tax credit, currently applicable only for goods, traders will be able to set off the service tax paid on rentals, distribution or other activities, thereby bringing down their costs of operation. “So, in that sense, the cost of services will come down, should they (traders) decide to pass the gain on to the consumer. However, it will all depend on them,” Bipin Sapra, partner, EY, said. –



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