Tuesday, December 1, 2020
Home Opinions GST – Government must ensure the benefits are passed to consumers

GST – Government must ensure the benefits are passed to consumers

3rd August 2016 became a historic day for economic reforms when Rajya Sabha passed the constitutional amendment bill to GST and paved the way for major taxation reforms. Almost all the political parties have broadly agreed on the concept of Goods and Service Tax (GST) and it is expected to become a reality from the next fiscal year. Initial target of introduction of this ambitious legislation was set for April 2010 and now it may see light of the day after 7 years, all thanks to our political maturity.

Finance ministry has released the draft GST law on 16th June and concerns have been raised on some provisions which is likely to be addressed by the ministry before this law is enacted. I have tried to highlight the key benefits which this legislation is expected to bring and the requirement of a vigil mechanism to ensure that the benefits are passed on to consumers also.

Benefits which are expected from GST

1. Central and state taxes will be subsumed after introduction of GST and will bring uniformity in indirect taxation across the country.

2. Seamless credit of taxes paid in the entire supply chain will be available to producer of goods or provider of services in which will eliminate the cascading effect of taxes on inputs and therefore price of products is expected to reduce.

3. Compliance burden will be reduced in the long run as there will be one platform for filing of returns, payment of taxes and assessments.

4. Tax evasion will be easy to trace as all the records will be uploaded on single platform and thus cross verification of purchase claimed by one dealer Vs sale declared by other dealer will be easy to corroborate. This will increase transparency and will check the black money circuit.

5. Reduced costs to manufacturers will increase the competitiveness of our products in export market.

Precautions need to be taken before GST is implemented

The report submitted by the committee headed by Dr. Arvind Subramanian suggested a standard rate of 16.9-18.9% for GST and the final rate is expected to be ~18%. Currently tax on goods is approximately 25% (Excise plus Sales Tax) while services are taxed @15% and accordingly services are expected to be costlier under GST regime. However cost goods is expected to be lower due to reduction in tax. Government should ensure that this reduced cost is passed on to the consumers and businessmen don’t indulge in profiteering.

Analysis of the impact of GST in countries like Australia, New Zealand, Singapore, United Kingdom etc. shows that implementation of GST will increase the inflation in medium term. In India, tax on services will increase therefore it becomes necessary for the government to ensure that benefit of reduced tax on goods is passed to consumers. Table 1 given below shows a trend in CPI after implementation of GST in some economies.

CPI Trend
CPI Trend

India is a free market economy and government intervention is not necessary in normal scenario to regulate the prices but taking a clue on inflationary impact of introduction of GST in other economies and expected increase in price of services, the government should setup a mechanism to check profiteering, otherwise this new legislation will come as a double whammy for the common man. Global experience shows that whenever there is an upward revision in taxes, business houses pass it disproportionately to the consumers but only a part of the benefit was passed on when tax rates were reduced (refer Table 2).

Pass through trend

Pass through trend

GST was introduced in Malaysia from April 2015 and The Ministry of Domestic Trade, Co-operatives and Consumerism (MDTCC) urged the business owners to adjust their pricing of goods and services and pass on the benefits to consumers. The ministry announced that investigations will be carried out for anti-profiteering checks as per their law to ensure the fairness. Similarly when GST was introduced in Australian the government also setup a commission to monitor the prices and protecting the interest of consumers.

GST will create a common market in India for goods and services but considering the vast geography of our country, prices of goods/services will not be similar at different locations. This will be on account of difference in direct cost (e.g. labour etc.) and overhead costs (e.g. transportation, warehousing etc.) at different locations which add to the total cost of goods/services and therefore state-wise review and monitoring should be done for price effects post implementation of GST. Central Government can consider the following to regulate and monitor profiteering-

1. Sector-wise and commodity wise data should be monitored for various locations or states. It will provide the details needed to assess ground reality.

2. Monitor the price change after implementation of GST. Retail price of the goods should be compared to check whether the ultimate consumer is getting the benefits.

3. Carryout the pass-through test (i.e. net profit margin analysis). Information from the published quarterly results of various companies across all industries can be taken for this purpose to verify that the net profit margin as percentage of sales or cost has not increased due to change in tax.

4. Quantum of pass-through may not be equivalent to the decrease in tax but it should not be the case that the overall tax amount is reduced but the price of the goods remain unchanged. During the transition phase there should be signs which show that the benefit of reduced tax incidence has been passed on to the consumers. In the long run, price levels will automatically become market driven.

5. Though CPI index provides a visibility about the price change but analysis of CPI index alone will not give the true picture after GST implementation. This is because weightage of services are low in the CPI basket and even a higher price increase for services will push the CPI by relatively lower proportion. Therefore head-wise price movement should be monitored in the transition phase and more attention should be given to those items which are of daily use.

6. GST implementation will take time even if it is passed by Parliament and enforcement agencies should ensure that business men don’t increase the price in advance in anticipation of GST implementation because once the price is increased and accepted by the market it becomes a benchmark for the seller.

 

By: – Shshank Saurav (Chartered Accountant and Anti-Money Laundering Specialist)

 

  Support Us  

Whether NDTV or 'The Wire', they never have to worry about funds. In name of saving democracy, they get money from various sources. We need your support to fight them. Please contribute whatever you can afford

Related Articles

Trending now

Fact-check: Is Prasar Bharati shutting down AIR radio stations in Kerala?

Prasar Bharati CEO took to Twitter to reply to allegations that AIR stations are being shut to cut down cost.

After Barkha Dutt failed to whitewash Khalistan supporter Deep Sidhu, Shekhar Gupta’s The Print picks up the pieces

Actor Deep Sidhu continues to refuse to call Jarnail Singh Bhindranwale a terrorist while he keeps participating in farmer protests

Father of Shehla Rashid files complaint against her saying she’s threatening him with life, accuses her of being involved in ‘notorious activities’

The father of the career-protestor-turned-politician Shehla Rashid claims the latter being involved in 'notorious activities'

Farmer group bats for ‘middlemen’, hails them as ‘service providers’ while scare-mongering about reforms in agriculture sector

Protesting farmers say that they are happy to pay commission to middlemen, claims new farm laws are not needed for their protection

What they never told you when they said India was the worst performing emerging economy

India’s economy contracted by 23.9%. For comparison, Brazil’s GDP contracted by 11.9% and Russia’s GDP by 8%. So, did they really do better than India?

Assam closes down temporary Covid-19 care centres, gears up to reopen elementary schools as pandemic gets under control

Assam has been witnessing reduced cases of Covid-19 with recovery rate of 98 per cent and the death rate of 0.46 per cent

Recently Popular

SFJ ads appear on YouTube offering $10m support for farmers, in return, wants Sikhs to join ‘Khalistan movement’: Details

Amid ongoing farmers’ protests in Punjab, Haryana, and Delhi, it is evident that Khalistani supporters have hijacked the protests and now, they are running ads on YouTube

Wife of late Wajid Khan writes on her sufferings in an inter-faith marriage, says anti-conversion law should be nationalised

Wife of late music composer Wajid Khan wrote how her husband and his family had been forcing her to convert to Islam after their marriage

Shiv Sena to organise Azaan recitation competition, party leader calls it as important as ‘Maha Aarti’

Shiv Sena is to bear the cost of the event and will also reward the contest winners.

Indian Idol contestant reveals how she faced opposition from conservative Muslim society as singing is ‘not allowed’

The Indian Idol contestant revealed how women in her society are looked down upon if they try to excel in any field.

Indian man proposes to his Australian girlfriend during Ind vs Aus cricket match, here is what happened next

While India's performance has been below par, netizens found happiness in the unusual proposal that became the highlight of the match.

His family called our children ‘illegitimate’ because I didn’t convert to Islam’: Late music composer Wajid Khan’s wife reveals

Wajid Khan's wife has stated to Times of India that the late music composer's family never accepted her wedding under the Special Marriages Act because she had refused to convert to Islam.

Sheetal Amte, the granddaughter of social worker Baba Amte, commits suicide by lethal injection

Sheetal Amte, social worker, allegedly committed suicide after dispute with family over the family-managed trust.

Leaked Wuhan documents: China misled the world about its mismanagement of Coronavirus pandemic, says report

The internal documents also revealed that it took roughly 23.3 days to process a case (from someone experiencing symptoms to confirmed diagnosis). While considering the internal difficulties, experts have conceded that the time lag was extraordinary.

Fact-check: Is Prasar Bharati shutting down AIR radio stations in Kerala?

Prasar Bharati CEO took to Twitter to reply to allegations that AIR stations are being shut to cut down cost.

After Barkha Dutt failed to whitewash Khalistan supporter Deep Sidhu, Shekhar Gupta’s The Print picks up the pieces

Actor Deep Sidhu continues to refuse to call Jarnail Singh Bhindranwale a terrorist while he keeps participating in farmer protests

Pilibhit: 12-year-old boy escapes from madrassa alleging he was chained and tortured by his teacher

A 12-year-old boy was beaten by head of the Al-Jamiatul Razvia Madinatul Islam madrassa in Pilibhit after he tried to go home

Father of Shehla Rashid files complaint against her saying she’s threatening him with life, accuses her of being involved in ‘notorious activities’

The father of the career-protestor-turned-politician Shehla Rashid claims the latter being involved in 'notorious activities'

Private procurements from Adnai group helped eliminate middlemen and generate more income, reveals apple farmers from Himachal Pradesh

Apple Orchard manager Manjeet Singh Dhillon informed that Adani group had been purchasing apples from farmers since 2006.

Eight months after cutting water supply of migrants to drive them away in middle of pandemic, Arvind Kejriwal govt offers free water to protesting...

Delhi Jal Board VP and AAP MLA Raghav Chadha himself went to Burari to ensure water tankers are available for protesting farmers

‘Shaheen Bagh returns’: Netizens react as protesting ‘farmers’ served biryani at Ghazipur in New Delhi

Biryani at the ongoing farmers' protest brings back memories of the 'organic' Shaheen Bagh protests

Farmer group bats for ‘middlemen’, hails them as ‘service providers’ while scare-mongering about reforms in agriculture sector

Protesting farmers say that they are happy to pay commission to middlemen, claims new farm laws are not needed for their protection

Connect with us

245,563FansLike
491,404FollowersFollow
20,200SubscribersSubscribe