How Will The Coming Of GST Help The Consumer?

How Will The Coming Of GST Help The Consumer?

The General Sales Tax (GST), ten years in the works, when implemented, probably beginning as early as 2017, will herald the advent of the greatest indirect tax reform in independent India.

From a plethora of overlapping state and central taxes, built-up over the decades, there will be instead, a countrywide single tax, to be collected at the point of ultimate sale, to the final consumer.

And this tax will be shared by the centre and the states, in a predetermined proportion, though it is only an examination of the detail that will reveal if certain states which have greater economic activity, will gain more, than others, where not a lot is selling.

But at a minimum, think of the cascading effect of-entertainment tax, VAT, excise duties, import duties, luxury tax, central sales tax, service tax, entry tax or octroi- and more, all gone in one fell swoop.

Even though the consumer will pay the GST tax, he/she is expected to still find everything less expensive than before, because there is no tax on top of tax rolled up in the price.

Inflation over the years could, of course, blunt the initial gains, even though it is well contained in the 5% region in the Wholesale Price Index (WPI), at present.

The infamous octroi points near state borders, with their serpentine queues of laden trucks, will become history, other gatekeeper cesses, imposts on raw-materials, layered onto each stage of production, service, or movement, all done away with.

Though implementation glitches, including attempts at evasion or wrong entries of sales clocked up on the real-time IT grid, are expected; eventually, the supply chain is bound to become faster and far more efficient. The tax collections and subsequent disbursements, hopefully on state and government works, will also become faster.

Manufacturing, logistics and retail industries in particular, all of which impact the consumer, will benefit substantially.

And provided all primary actors pass on a good deal of their tax savings, something that natural unfettered competition should ensure, the consumer will benefit significantly.

All the taxes the GST replaces, unbelievable as it seems, will be scrapped simultaneously. This will not only make for cost/price efficiencies, but also simplify life, for both the payers and the collectors.

And this GST tax will be contained at under 18%, probably at 15% to begin with. Congress, the original author of the bill, wants a cap at 18%. Of late, it wanted it in the constitutionally passed act that would need  two-thirds assent from the centre and all the states, for changes, but now is likely to agree to its inclusion in a part of the legislation not quite set in stone.

The proposed new tax, grown old in the birthing, will be calculated on the final cost of production of goods and services and not on the maximum retail price (MRP), another anomaly, suggesting administered prices, left over from socialist times under Indira Gandhi.

It is not yet clear if everything will fall under  the purview of GST, but the attempt will be to have as few exceptions and exemptions as possible, for its greater effectiveness, going forward.

Will manufacturing heavy states be allowed to levy an extra percentage point? Is petroleum, electricity, alcohol, and tobacco, going to be included? Will luxury cars be allowed to benefit so dramatically with many of them imported in fully-built form?

But, as it stands, mid-size cars, manufactured in India, could theoretically see a 22% price cut from the tax reduction alone!

The Union Finance Minister, Arun Jaitley, to calm the jitters of states that fear loss of revenue, has said, repeatedly, that he will have the centre make up the difference. But for how long? Isn’t the eventual idea, that competition should replace protectionism in a free market?

The GST law is expected to pass in this Monsoon Session of parliament, starting on July 18^th , at last. There is reportedly both the consensus and the numbers to see it through the Rajya Sabha, even if Congress, with a reduced strength of 60 seats down from 68, resists.

How will the consumer gain?  End-pricing, the controversial MRP, should be decidedly better, and competition, read discounts, for his rupee, keener.

Consumption is therefore in for a boost. And this should set off a virtuous cycle, going all the way back to producers, manufacturers,  and service providers.

While the GST tax will be lower than the cumulative taxes on everything prevalent now,  it will also iron out differential pricing, where the same item is priced higher or lower, depending on where, in which state, you are buying it.

With GST, there will be uniformity of pricing, less the discounting, or the  value-add, the premium building. The government, both in the centre, and the states, will share the tax, and both are definitely expecting  to gain revenue, from greater compliance, if nothing else.

The economy is  also likely to be bumped up by 2-2.5% of GDP in due course, as a result of this unified tax,.

The good monsoons expected this year, and two years going forward, is expected to add a percentage point from agriculture too.

The confidence in this arises from the effects of El Nina, following the droughts brought on by the El Nino years, just past, as it has proved to have a marked effect on global weather, the sea currents etc.

All this, added to the present GDP rate of about 7.5% , could well take the Indian GDP rate into double-digits for the first time. The question remains however, that how much of a time-lag must be endured before this shows up in the statistics.

Former West Bengal finance minister Asim Dasgupta, who headed the panel of state finance ministers set up to give contour and shape to the GST Bill said ‘The strength of the GST lies in avoiding the continuous levying of taxes from producer to consumer.’

Much therefore depends on the roll-out, and how the process works in practice. There are many details that are still a matter of conjecture and contradictions will come to light gradually and have to be amended.

The tax itself, is expected to be around 15% at first. But since manufacturing is a complicated process, arriving at accurate costing is difficult. So, at every stage, the GST will work on the principle of value-added. Likewise, for specialised services, that are also not that easy for  the taxman to fathom.

Tax compliance on a largely automated system is expected to increase, because of GST, swelling the revenues of state and centre. Exemptions will be avoided, and the tax-base will expand.    

Prime minister Narendra Modi, perhaps sensing that the long journey towards enactment of this transformational law is almost at an end, recently said no political party should ‘commit suicide’ by resisting the enactment of GST any further.  But at the same time, he refused to be boxed into a provocative ‘deadline’, and said he preferred to think of a ‘lifeline’ instead.

The virtual isolation of the ostensibly softening, but still resistant Congress, quite capable of raising fresh obstructions, means the Modi government will try to work the breakthrough with the remainder of the opposition, to finally pass the GST bill. 

If that happens, on this 70^th year since independence, a new modernist era will have dawned, with GST as its proud symbol. One nation, one holdall indirect tax, many Gods.

For:  The Sunday Guardian

(1,229 words)

July 18^th, 2016

Gautam Mukherjee