As the July 1 deadline for the rollout of the Goods and Services Tax (GST) draws near, the financial press is filled with tales of woe from businesses large and small. Apart from fervent pleas to the Government to defer implementation, India Inc is worried that the new tax regime will raise costs and tax outgo. Retailers are busy with pre-GST sales urging you to indulge in one last shopping binge.
But before you fall for all this propaganda, it is important to appreciate that GST is a tax reform intended to benefit consumers. Here’s why you should look forward to GST.
It’s an umbrella tax A few days ago, hotels and restaurants across the Southern states downed shutters in an anti-GST protest. Reports said that compared to a VAT of 14.5 per cent being paid by the hotel industry, the GST regime would levy 18 to 28 per cent. That’s technically true, but doesn’t reveal the whole picture.
If you’re a frequent traveller, you’ll know there are several taxes besides the State VAT that bloat your hotel bill. Apart from the VAT of 10-15 per cent on food items, there’s luxury tax of 3-10 per cent and service tax of 6-8 per cent on room rent. Both VAT and luxury tax rates vary for different States and room tariffs. Post-GST though, the hotel bill will feature just one tax – the GST. Under the GST regime, stays with room rents below ?1,000 are entirely exempt. The rate is 12 per cent for non-AC restaurants and rooms with tariffs up to ?2,500, and 18 per cent for AC restaurants and rooms with tariffs up to ?7,500. Premium rooms costing upwards of ?7,500 a day alone will be taxed at 28 per cent. In effect, if you add up all the present levies, you will find hotel stays actually turning more affordable post-GST for budget and mid-range hotels.
The hotel industry’s case just illustrates why a straightforward comparison of the current state VAT, Cenvat or service tax rates on any item with the new GST rate gives you a misleading picture of the impact. GST is touted as a tax reform mainly because it is an umbrella tax that subsumes many State and Central taxes. Come July 1, a single GST will stand in for a battery of taxes – central excise, service tax, additional and special additional customs duty, state VAT, central sales tax, purchase tax, entry tax and octroi.
This ushers in greater transparency for consumers. It benefits manufacturers too. Instead of liaising with multiple tax authorities, the manufacturer gets to deal with a single entity – the GST Network.
It isn’t inflationary When GST was mooted, there were apprehensions that the default GST rate would be pegged at 20 per cent or higher, that service tax rates would shoot up from 15 per cent and that essential goods would attract steep levies to bolster tax revenues for the exchequer.
But these fears have been allayed by the GST Council, which has designed the rate structure to be progressive. The default GST rate is 18 per cent. Merit and essential goods (atta, milk, bread, medicines, tea, coffee) remain zero-rated or attract just a 5 per cent levy. Most packaged products attract 12 or 18 per cent. The 28 per cent rate is applied to what are perceived to be demerit goods, with a cess on ‘sin’ goods. A similar graded scale, rather than a blanket rate, has been applied to services too.
Yes, the reset of rates under GST will raise taxes on exempt as well as demerit goods. Quite a few services will also attract higher taxes. But with lower taxes on goods balancing out the hikes in services, GST’s aggregate impact on the household budget is expected to be neutral.
A study by Nomura Securities in end-May compared existing tax rates (including VAT, excise, service tax, and so on) with the new GST rates for 196 items in the CPI basket. It concluded that GST would reduce official CPI inflation by 0.33 per cent in the near term. An impact study by CRISIL notes that consumer items such as soaps, hair oils, two-wheelers, commercial vehicles, cars and SUVs will see a 2-12 per cent cut in tax outgo post-GST. Services such as telecom, financial services and air travel will be pricier by 3 per cent, but the burden will be reduced by input tax credits.
The GST Council has also been quite accommodative of genuine petitions for lower rates, reviewing 66 items in a recent meeting.
Don’t forget input credit A big advantage of the GST that is being swept under the carpet in the blanket rate comparisons is the seamless input tax credit.
India is already supposed to be on a value-added tax regime. But under the current fragmented system, with the Centre and States levying separate taxes, the value-added concept exists only on paper. State VAT and the central taxes cannot be set off against each other. Within Cenvat, manufacturers cannot claim set-offs for central sales tax, additional excise duty or additional customs duty on inputs used. Likewise, state VAT does not allow input credit for central sales tax, octroi or mandi tax. Tax credits on capital goods are denied both to manufacturers and service providers.
As a result, indirect taxes are often charged twice or thrice on the same good or service. The inflated bill is then glibly passed on to the consumer. By unifying taxes, GST sorts out these tangles and allows smoother tax set-offs across the value chain. This is bound to reduce selling prices for consumers.
Well aware that consumers may not be savvy enough to grasp such nuances and demand a better deal from firms, the Centre proposes to set up an anti-profiteering agency too. This price watchdog can force firms to pass on GST benefits to consumers, levy penalties and even de-register the ones found to be ‘profiteering’.
Lower costs There’s a lot of hand-wringing about the transitional issues and compliance costs that will be unleashed by GST. Yes, GST contemplates an overhaul of the present indirect tax system, possibly disrupting businesses over the next one or two quarters. But in the long run, this may be a price worth paying.
By charging tax on stock transfers, GST forces firms to rejig their logistics and supply chains, which will entail costs. But in the long run, this could lead to enduring cost savings as firms can run their supply chains on purely commercial lines, instead of basing them on VAT differences between States. Filings and assessments under GST are to be entirely online, resulting in a lot of filings for taxpayers. But then, reducing personal contact between taxpayers and officials shrinks the scope for bribery and evasion.
GST imposes a tax obligation on firms dealing with unregistered suppliers, which is a pain point. But if this sweeps large swathes of the informal economy into the tax net, the higher tax collections will eventually flow to taxpayers.
In short, unlike demonetisation, GST is a reform move where one can be fairly sure that short-term pain will lead to long-term gains.