04/08/2016 11:01 AM IST | Updated 08/08/2016 8:26 AM IST

How Will GST Impact The Economy And The Common Indian Consumer?

Rupak De Chowdhuri / Reuters

It's been raining hallelujahs all over the country ever since Parliament passed the GST Bill on Wednesday, following a delay of nearly 16 years. There is much exultation about a uniform tax platform which will be beneficial to growth, provide uniformity in compliance, and herald an all-round seamless structure in all matters tax. How much of this is actually true, though, lies in the finer points of the impact of the GST on the average consumer (that's us) and the GDP of the country.

Tackling the bigger picture of growth, the GST law takes all the state taxes and brings them under one common umbrella. This has caused some consternation, as evidenced in the Parliamentary debate, to certain manufacturing states like Tamil Nadu and Maharashtra. Tamil Nadu is concerned that as a result of tax integration, they stand to lose about ₹9270 crore in revenue and want the proposed compensation structure increased to at least five years. Maharashtra is crying foul because they believe they stand to lose ₹7000-8000 crore because the local taxes/octroi being collected in the state will be subsumed within the tax net and not be adequately compensated. The Left parties think that fiscal federalism is under threat as the GST will take away the rights of the states and local bodies to collect taxes, which are used for internal benefit. Since, the autonomy of the states will disappear and the states will have to wait on the Centre for their share of taxes, this could be a major sticking point in the entire process.

The cornerstone of GST is pricing and talk of growth, at this stage, is at best a wonderful story with no empirical illustration.

Further, there is talk that the GST may increase growth by about 2% if introduced next year. This purportedly means that the growth index may move as high as 9.5% in the next couple of financial years. Traditionally, in India, supply has mostly been equal to demand in the economy. If the proposed rate of GST is kept at 18%, this may lead to rising costs in the economy which will inevitably be passed on to the consumer. This could lead to lower demand, thus affecting supply, because of which the economy may not be able to sustain a high percentage of growth. Further, there is talk of a revenue-neutral rate on a neutral inflation factor where increase in service cost is compensated by lower cost of goods. But, in reality, it is to be seen whether the industry really pushes down prices of essential items as that leads to lower balance sheet figures. So, the cornerstone of GST is pricing and talk of growth, at this stage, is at best a wonderful story with no empirical illustration.

The compliance story has its plus points but also issues within the fine print. Since, there is a duality of taxes involved, states have to monitor their individual tax compliances and set up IT infrastructure. Small businesses, which were earlier outside the ambit of taxes, must now take up a significant compliance burden, though Section 43A of the Model GST gives them some leeway. Emerging industries like the e-commerce sector have been tasked with a mammoth compliance structure which they must rigorously adhere to. These additions to the compliance structure are welcome from the perspective of seamless integration of taxes but are bound to have teething problems, at least at the nascent stage.

If the standard rate of GST is capped at 18%, there exists a scenario where prices of goods can significantly reduce for the customer.

Finally, the impact of pricing on the common citizen. Goods today are typically taxed at 12.5% (excise duty) plus 5-15% (VAT) which is invariably passed on to the end customer. If the standard rate of GST is capped at 18%, there exists a scenario where prices of goods can significantly reduce for the customer. This is because procurement costs will also go down for a business and some of the profit can be passed on to the end of the chain. The corollary to this is the Consumer Price Index where 55% items are tax-exempt, 32% are at a low rate and only 12 % are at a standard rate. This means that some essential items in a household (textiles, books, cooking oil etc) are actually subject to about 5-8% tax because of exemptions. If the rate hits 18%, then these goods go up in pricing, wobbling the entire structure. In the service industry, the typical tax output will go up from 15% to 18%. However, the industry will benefit from the availability of non-credible taxes on their input side (VAT etc) which were not previously available; hence the impact can be kept minimal. The summary to the pricing story is that industry stands to benefit immensely from consolidated tax rates, lowering of taxes on procurement and availability of more input taxes to offset output taxes -- but whether that will be passed down to us is a matter of speculation. In the end, there is a definitive business case of passing lower prices to the end customer but whether a reduction will happen is a call industry will take with much trepidation and scrutiny.

The actual success of the GST will really depend on the impact on the common Indian consumer. In a scenario where the introduction of the GST can still be pushed down to FY18, whether the seamless integration and passing of benefits will really happen is a matter of considerable speculation. Till then, it is a good time to sit back and enjoy the dance of politicians and economists in the greater backdrop of Parliament with the so-called promise of good times ahead.

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