GST – Government has to ensure the benefits are passed to consumers also
Tax on services will increase by app. 20% from the current tax rate after implementation of GST and therefore it becomes necessary for the government to ensure that benefit of reduced tax on goods is passed to consumers. Analysis of GST impact for various countries shows that implementation of GST will increase the inflation in medium term and therefore government should setup a mechanism to check the profiteering otherwise this new legislation will come as a double whammy for the common man.
Most of the political parties except Congress led UPA have broadly agreed on the draft Goods and Service Tax (GST) law and 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
- Central and state taxes will be subsumed after introduction of GST and will bring uniformity in indirect taxation across the country.
- 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.
- Compliance burden will be reduced in the long run as there will be one platform for filing of returns, payment of taxes and assessments.
- 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.
- Reduced cost will increase the competitiveness of our products in export market.
Precautions needs to be taken before GST is implemented
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 22% (Excise plus Sales Tax) while services are taxed @15% and accordingly services are expected to be more costly 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 to consumers and businessmen don’t indulge in profiteering.
Analysis of GST impact for 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 by app. 20% from the current tax rate and therefore it becomes necessary for the government to ensure that benefit of reduced tax on goods is passed to consumers.
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 to carryout investigations for anti-profiteering checks as per their law to ensure the fairness. Similarly when GST was introduced in Australia, the government also setup a commission to monitor the prices and protecting the interest of consumers.
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, government should setup a mechanism to check the profiteering otherwise this new legislation will come as a double whammy for the common man.
By: – Shshank Saurav (Chartered Accountant and Anti-Money Laundering Specialist)