Will the burden of GST be ultimately borne by the consumers?

Food and trade policy analyst
Devinder Sharma

When Value Added Tax (VAT) was introduced in 2005 it was hailed as a major reform in tax administration. Ten years later, Goods and Services Tax (GST), which will subsume VAT and sales tax, is being projected as a crucial reform that will put India into a growth trajectory. While streamlining the cumbersome tax collection process is long overdue, it is the untested claims that the real beneficiary will be the consumer is something that I fail to digest.

This is exactly what was said when VAT was introduced. But instead of benefitting the consumers, inflation has been on an upswing. In fact, many believe that the burden of VAT reforms has actually fallen on the poor who had to pay a higher price. Although numerous agricultural commodities, including cereals and pulses, cattle feed, poultry feed, farm implements etc were exempted from VAT, I don’t know of any manufactured product for which the prices came down. This is simply because the tax benefit was misappropriated by the trade and not passed down to the consumers.

This is not the first time we have seen tax benefits not being passed to the consumers. I remember Dr Manmohan Singh, when he was the Finance Minister, pleading before the trade to pass on to the consumers the excise tax rebate that he had announced in the budget. It never happened. More recently the RBI governor Raghuram Rajan has expressed dismay at the banks not passing on the advantage of repo rate cuts. So much so that the government has even failed to ensure that taxi operators are made to slash tariff rates when petrol prices have come down by roughly 60 per cent. If you can’t tame the taxi operators it is futile to talk of the rest of the industry. I am therefore not sure whether the tax savings that is being talked about will ever be passed on to consumers.

Several studies have shown that inflation goes up in the short-term when a tax regime like GST is introduced. It happened in Australia, and also in Canada. But what is being missed out by analysts and researchers is that once the inflation rate soars (as is expected from GST) the base price on which inflation is calculated is also raised. The rate of inflation subsequently appears low because the base price on which it is calculated is already gone high. While the Government has all the reasons to feel elated with the GDP expected to increase by 0.9 to 1.7 per cent in the medium term, it must tell us what will be the additional burden on consumers.

In the previous budget, service tax has been raised from 12.36 to 14 per cent. This is simply to facilitate the transition to GST from April 1, 2016. If the rate of GST is fixed at 16 per cent, as some economists’ estimates, the service tax you end up paying will merge with the GST rate. If it eventually goes on to 18 per cent, as some studies point to, you will have to pay 18 per cent service tax. If the tax collections are to increase manifold by avoiding ‘tax on tax’ cascading effect and also by removing the 17 hurdles in tax collection process, I thought the benefit should be passed on to consumers.

In other words, a consumer will end up paying 16 (or 18 per cent as the GST final rate comes to) service tax just as a way of adjustment to the new tax regime. Since service tax collections now exceed excise and customs tax revenues, reports say the government had collected Rs 2.15-lakh crore as service tax in the previous fiscal. A year earlier, it was Rs 1.65-lakh crore. In other words, the jump in revenue collection is primarily because of the higher service tax collected from consumers. Be ready to pay still more.

Let me make it clear. I am not against the introduction of GST. But what needs to be told, with empirical evidence, is how much will be the reduction in particular goods and services once GST comes into effect. Also, how will the Government ensure that the benefit is passed to consumers needs to be spelled out clearly? #


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