In a few months from now, GST will be a reality. The buzz around this new tax structure has been hard to miss, what with corporates crying foul every other day about the rules and regulations thereof—and it's completely understandable. No one wants to pays more taxes than what seems logically applicable: not the big brands with their luxury goods, not the mom-and-pop joint down the road, and certainly not you—the end consumer in this financial merry-go-round. So, while the bigwigs fight their battles, let us take a look at how GST will affect the life of a typical Indian household, and change the "aate daal ka bhaav" as we know it.
As we all ought to know by now, the GST (Goods and Services Tax) is a unified tax that will subsume and replace all the other taxes in the country (VAT, sales tax, excise etc.). The bill is in the final stages of approval in the Lok Sabha, and the appointed date for nationwide implementation is 1 July, 2017. Now, the GST Council—which is a committee of state finance ministers and the Finance Minister of India Mr. Arun Jaitley—has announced broad tax slabs for the country. These have been pegged at 0%, 5%, 12%, 18%, and 28%. However, it is still not clear how individual items on a taxpayer's daily needs list will be affected, and there is still some confusion surrounding prices for various sectors (explained in detail below).
How GST will affect the prices of goods
In tax terms, "goods: refers to those products which you can use or consume. They are tangible properties, which can be used once or repeatedly. From the bread on your table to the car you drive to work, they are classified under goods.
Indian consumers pay a "tax on tax" on every purchase, which increases the end cost of the goods. Add to this the arbitrary state taxes that keep varying.
Currently, the indirect tax on goods is slightly on the higher side. Indian consumers pay a "tax on tax" on every purchase, which increases the end cost of the goods. Add to this the arbitrary state taxes that keep varying. Goods like beauty products, non-luxury cars, electronic etc. can attract an excise duty of 12.5% and a VAT of 12.5% to 15% depending on which state you are in. This is why buying a car in Haryana is cheaper due to lower road tax rates than in Karnataka or Maharashtra. It is assumed that today, a consumer pays 25-26% tax over and above the production cost of any goods. The GST bill aims to streamline all of this arbitrariness and bring equality in prices across the country.
According to the Finance Minister, essential items like food—which forms the major chunk of household expenditure for many Indians—will be taxed at zero rate to keep a check on inflation. Common use items will be taxed at 5%, and others at 12-18%. Some goods (like textiles) which attract no excise and marginal VAT (5% for textiles) might cost more if the GST on these is kept in the 12-18% bracket. Similarly, small cars which attract an excise duty of 8% will cost more if GST is kept at the proposed 28%. Luxury cars, which are currently taxed at 50%, will cost less under GST but with the government planning to add additional cess to luxury category items, it's not Christmas yet for car lovers in the country.
How GST will affect the prices of services
Currently, this sector is taxed at around 15%. This includes services like road transport, aviation, real estate etc. which have been provided value abatement/subsidies by the government since 1994, which decreases their effective cost and allows the 15% tax (including cesses) to be levied uniformly across the sector.
As manufacturing costs for businesses come down, we can aim for a unified and more streamlined market where things cost exactly what they should and not more.
It is likely that all services would be taxed under the 18% bracket. Recently, reports of the government planning a differential tax structure for the services sector have started to surface. Let us understand what this means and why it is necessary. Assuming that the government rules that all eating places will have to pay 18% GST, this would include restaurants in five star hotels as well as small diners, causing customers to pay more. Therefore, a criterion has to be decided for the implementation of the tax rate. It could be merit-based (for instance 5 star hotels are charged higher than small eateries) or value-based (based on the price of the meal). This differentiation is vital to the services industry because services like IT, accounting etc. are used by a varied customer base. Unlike the goods sector, where it is easy to pinpoint luxury vs. common goods, services are not that black and white. But whether or not the government adopts this policy remains to be seen. In Australia for example, services are taxed at a uniform 10%. Europe, too, follows a standard rate of tax for services.
So, what does this mean for you?
Well, if there's one thing we know it's that the GST Council is doing its best to come up with a tax structure that is to everyone's benefit. Besides, the government has indicated that the impact on revenue will be neutral. Inflation is an inevitable by-product of tax change, and every other country that has implemented GST has gone through a period of inflation until normalcy returned.
India, too, will face a period of transition but hopefully, it will not be a tough one. The Japanese financial research company Nomura has released a report which concludes that inflation post GST will only be marginal. And in the long run, as manufacturing costs for businesses come down, we can aim for a unified and more streamlined market where things cost exactly what they should and not more.