Prices of most goods expected to go down after GST is enacted from 1st July

The GST council is meeting on 18th and 19th May in Srinagar to provide the finishing touches to the proposed singular tax and to finalize the rates of all the products and services. On Thursday the council had finalized the tax slabs for about 1221 products, except for a few state-specific items, services and a few commodities which would be discussed on Friday.

The GST is all set to kick in from 1st July and will replace all the existing indirect taxes like the Value Added tax(VAT), Excise duty, various state taxes among others. Captioned as “One Nation One Tax”, the GST is expected to eliminate all the assorted taxation hassles plus ensure “free trade” within India.

To refresh things a bit, there would be four tax slabs of 5%, 12%, 18% and 28%. All the products would be placed in any of the 4 slabs apart from those which are all-together exempted from taxation like milk and food grains.

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According to reports coming out which have analysed the rates, all of which are given here [PDF], the conclusion seems to be that consumers can hope for good days ahead as the GST is expected to reduce the prices of most products.

In the GST, about 81% of the products would be taxed at 18% or below while currently about 35% of the products are taxed at 27% (12.5% excise + 14.5% state VAT) but the actual amount is a bit lower at about 22-24% as the excise duty is levied on the factory price and not the retail price.

Also Finance Minister Arun Jaitley has been quoted as saying that they have consciously reduced the tax rate for many items.

Some products with a reduced tax rate are:

  • FMCG goods like soaps, tooth paste etc would be taxed at 18% as compared to the existing 22-24%
  • Tax on coal would reduce from 12% to 5% which has the potential for making power cheaper
  • Food grains, milk, sweets which are taxed at 5% would be exempted altogether.

According to the report apart from the lower tax rate in some cases, the retailers can sell the products for a lower price as they would have a higher input tax credit at their disposal.

Input tax credit means that whenever a retailer buys a product from the dealer he has to pay some amount as tax, say he paid Rs 100. Now when the customer buys the product he would pay a higher tax as the retailer sells the product at the higher rate, say the customer paid Rs 150. Now as the retailer has already paid Rs 100 as tax to the government, he only needs to pay Rs 50 in taxes by claiming input credit. So if the input tax credit increases for the retailer they can pass on the benefit to the customer by reducing the prices.

Plus even though about 19% of the products are pegged under the 28% slab, experts believe that currently one may be paying more than that rate for those products and the new slab may be a relief.

Even though the Finance ministry has tried to appease everyone via these new rates, some issues did crop up. As reported, the government has proposed a cess of 1% and 3% on small petrol and diesel cars and a cess of 15% on luxury cars. This cess would be added onto the 28% GST rate which has been finalized for cars. Now the luxury cars would attract a total tax of about 43% which in some cases would be lower than the existing rate which is anywhere between 25% and 55%.

But when it comes to small cars, the rate would rise to 29-31% as compared to the existing 25-27%. OpIndia columnist Ashutosh Muglikar acknowledged that people indeed were expecting to have lower rates for small cars but urged everyone aggravated to look at the big picture. He claimed that the existing cess has only been levied so as to slowly disincentive the use of conventional cars. He further claimed that this is in line with the government’s continued push for renewable energy.

He pointed out Nitin Gadkari’s statement around May 15th about the government planning to come up with its electric vehicle policy by December. According to a Niti Aayog joint report, accelerated adoption of electric vehicles would mean a total saving of $60 billion in Diesel and Petrol costs plus would reduce carbon emissions by about 1 Gigatonne come 2030.

Ashutosh also pointed out that the government’s decision in budget 2017 to invest about 4 lakh crore in one year to revamp the existing railway, waterway, aviation infrastructure would mean compensating in the areas like personal vehicles to further incentive public transport.

The council though hasn’t been able to finalize the rates for bidi, cigarette, textiles, agricultural implements, footwear, non-processed food, gold and various services. These rates would be discussed on Friday and if some rates still don’t get finalized today, another meeting would be called soon.

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