Based on goods and services tax rate and its implementation, some essential items may become cheaper.
The goods and services tax (GST) is being talked about as the single most powerful tax reform that India will see. The objective is to end the regime of multiple taxes on goods and services and bring them under one rate.
The system will change from the current production-based taxation to being consumption-based. Along with bringing about a semblance of uniformity in taxes across states, this is expected to increase efficiency and compliance in the system. A recent note from HSBC Global Research stated that although the growth impact of GST on the economy is difficult to quantify, a positive impact of 100-150 basis points (bps) can be considered assuming an “ideal” GST. One basis point is one-hundredth of a percentage point.
The report added that not including goods like petroleum, electricity and alcohol can blunt this range by at least 20 bps. Nevertheless, it is expected that GST will have a positive impact on India’s growth.
The government has a deadline of 1 April 2016 for implementation of GST, albeit a watered down version. Whether it is able to meet the deadline is debatable given the logjam in passing the Constitution amendment bill as a first step towards GST implementation.
In the meantime, let’s understand if this were to get implemented, how will your spending pattern change. Will you pay more or less for goods and services than you do now?
Goods likely to get cheaper
What the GST will do at a basic level is replace all the indirect taxes that currently exist. The central excise duty, value added tax, service tax, octroi, luxury tax and so on will get substituted with one GST.
For manufactured consumer goods, the current tax regime means the consumer pays approximately 25-26% more than the cost of production due to excise duty (peak of about 12.5%) and value added tax. While there hasn’t been any indication of a GST rate, experts suggest between 18% and 22%. Given this, basic goods are likely to become marginally cheaper.
Dharmesh Panchal, partner-indirect tax, PwC India, said, “In today’s system, production of goods is taxed and the rates are high. Moreover, tax on tax adds to the cost build-up. With GST, overall taxes on goods are likely to come down making them cheaper.” Consuming states will receive revenue from tax and producing states will get compensation.
Certain essential items such as raw food articles are not taxed at present and this is expected to continue. Bipin Sapra, tax partner, EY, said, “Where food articles presently don’t have a value added tax or excise, GST is unlikely to apply.” Hence, prices of essential food supplies may not change.
Processed food will continue to be taxed, but the applicable GST is likely to be lower than the current combined tax on such products. Hence, expect these to become slightly cheaper.
On the other hand, for goods where the current duty structure is lower, for example, small cars, which have an excise duty of only 8%, the impact of GST will most likely be opposite—these can get more expensive. Heavy vehicles such as SUVs and large cars that have an excise duty of 27-30% will see a marked drop in prices if GST is implemented in the expected range of 18-22%.
There is one more item to watch out for; petroleum. It has been proposed to keep this out of the GST umbrella for at least the first two years, which means petroleum prices aren’t likely to change with the advent of GST and the variance in prices across states could also continue.
Sapra said, “With the cost of goods and services that are consumed in refining and distributing petroleum remaining high, indirect cost on goods distribution will also remain high and that might add up to the final cost of goods.” So, the effect of petroleum cost will not change for the time being. But given that crude oil prices are falling at present, petroleum cost may not have a negative impact.
Lastly, prices of goods may not be completely uniform across states as there is talk of allowing states to have 1-2% variance in tax. “Let’s assume that if the median GST rate is 20% and the Centre applies 10%, for the remainder, the states may be allowed, say, a range of 9-11% levy,” said Sapra.
We will have to wait and see what this difference amounts to. Dinesh Agrawal, executive director, indirect tax, Khaitan and Co., said, “At present, the difference in prices of goods across states is more due to octroi and value added tax. Even if the variable tax of 1-2% for states comes into play with the GST, the difference won’t be much. By and large, there should be one maximum retail price (MRP) as companies should be able to absorb this amount.”
Services that could get costlier
Service tax rate at present is 14% and it applies to almost all services other than essential ones such as ambulance services, cultural activities, certain pilgrimages, sporting events, among others.
If GST is implemented, this rate will increase (given the expectation that GST will be 18-22%) making services more expensive. So, if you eat out often or travel a lot, your bill is likely to get higher.
“With overall taxation changing, the central government also has the task to balance its books. By and large, cost of services will go up but essential services for mass consumption could see a lower rate,” said Panchal.
Investment management and insurance premiums, which attract a service tax currently, will also become costlier with the higher rate of GST.
Agrawal said, “All financial services will continue to be in the tax net. The question is how the value of a service will get computed. Initially, this value may be on the lower side resulting in a lower tax amount, and gradually it could be taken up.”
Will the GST really unify goods and services and remove distinction? Agrawal said, “The objective is to dilute the distinction between goods and services but some distinction may be needed, at least in the initial phase, so that the change in taxes for services isn’t too sharp.”
Before GST sees the light of the day, there are many creases to be ironed out. “Firstly, the constitution amendment bill needs to pass for GST to become a reality. Then the technology platform, which the government is working on, should be implemented, and the GST draft legislation needs to be released for discussion with all stake holders,” said Panchal.
We also have to consider the impact of inflation. The HSBC Global Research report said that assuming GST at 20%, services would see a rise in tax rates while manufactured consumer goods may see a fall. The two are likely to offset each other resulting in a limited net impact on inflation based on the consumer price index. But actual impact on inflation can’t be known with certainty as much depends on how the change in tax rates is passed on to consumers and what the actual GST rate is. If there is a partial pass through of higher taxes, impact could be limited, but if GST rate is higher than 18-22%, effect on inflation can be more than anticipated.
Apart from that, two levels of GST—state and Centre—also means multiple compliances. This could mean stricter compliance and audit but also an increase in cost of compliance. Globally, the norm is a single, central GST. “It’s yet to be seen how the central government and state governments function on a common platform given the existing cultural and operational differences,” said Agrawal.
The GST credit flow is proposed to be in a way that each person needs to input details of invoices issued containing details of the customer, for the next to receive credit. According to Sapra, if vendors aren’t able to upload invoice details, then credit blockages can happen.
Mint Money take
Besides the political will to pass the necessary bills in Parliament, there are still many roadblocks to be crossed when it comes to implementation of this new tax regime. Whether it eventually makes life less costly and more efficient remains to be seen. But what is certain is that if your monthly budget is beyond just the essential consumer goods, there will be a one-time impact that will make your overall expenses increase when the new regime comes into force. Moreover, there could be an inflationary impact to deal with. The extent will depend on the GST rate and the pass through.