How to make GST benefits trickle down to common man?

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Amid all the political battling over the new tax reform in India, the consumer is left scratching her head about why a good and simple tax has raised prices for her.

The advent of GST introduced — if anything — among consumers the healthy trend of scrutinising the bill. | M. Periasamy

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“I will call GST Good and Simple tax”

~ Prime Minister Narendra Modi,

July 1, 2017

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“The government ignored all our suggestions on GST and introduced it with celebrations at midnight. In their GST, there is the highest 28% tax and three return forms that makes the GST Gabbar Singh Tax”.

~ Congress vice-president Rahul Gandhi,

October 23, 2017

With election season, often comes the campaign-trail affliction — claims, counterclaims, shows of one-upmanship and whataboutery (or is it whataboutism?). Say what you want about other topics, but that the issue of Goods and Services Tax (GST) has dominated the airwaves recently is hard to refute. Over the last few months, a wide variety of opinions and claims regarding the landmark GST have emanated from different regions of the political spectrum, and indeed the general populace. Various economists and pundits have passed on a message on more or less similar lines: GST is a game-changer, India will leapfrog into the forefront in the digital age, how it will improve tax compliance and impact tax collection, solve global warming, bring down hunger, cure deadly diseases, foster world peace and so on. It was as though everyone knew the drill.

 

At the same time, there have been various accounts of confusion about the rules and rate of tax, additional paperwork, and a churning of set processes by which the country used to largely operate. Business schools, various civil services and job aspirants have not been spared either; they have now been thrown into a tizzy, and are probably bringing themselves up to speed with the latest developments. What is worse, they are also expected to have ready answers for what it is about and how it will change things, much like the 2008 sub-prime mortgage crisis.

The many advantages of the GST have been discussed before, and they fall largely into three camps.

One, many taxes such as the service tax (on services), value added tax (on Goods), excise duty, entertainment tax, octroi along with a host of other duties, surcharges and cesses now come under its umbrella. In some sense — pardon the hackneyed reference — it is the one tax to rule them all, and brings down the cascading tax structure.

Two, since this is a tax based on consumption (paid at the place where it is consumed, as opposed to where the goods or services are “produced”), goods can move faster across various State borders, thus reducing precious time and costs associated with delays in transportation. An oft-quoted anecdotal example is that it is far easier to sell goods in X (where X is a neighbouring country) than in B (where B is a far-flung State in India).

And three, tax is largely paid on the “value addition” or “contribution” by the particular goods manufacturer or service provider; this now means that the GST payer only pays tax on the selling price of his product/service, after deducting the tax paid on input items (like raw materials) and services used over the course of producing the good/service. The earlier Value Added Tax (Tax) did do something similar previously, but it didn’t take many taxes into the input consideration — and hence GST clearly had the advantage in this regard.

 

It was like being at the casino — whatever you did, the house always won at the end. With this happening, what can we hope for? Perhaps, the answer lies in competition — the last refuge of the customer.

It hasn’t been smooth-sailing by any stretch of imagination. The multiple rates of GST have been criticised — that it could lead to classification disputes and lobbying. There have also been apprehensions regarding the additional burden of filing multiple returns, software glitches and a fear of the unknown. Apart from these teething issues, expecting everyone to seamlessly come under the ambit of GST is wishful thinking. The informal sector (apparel manufacturing, for instance) would definitely feel the brunt of such a ruling; entities desirous of claiming input tax credits would want to deal with vendors taking care of their own GST matters. How the informal sector would react to such a sudden demand for financial and regulatory literacy is anyone’s guess at this stage. A gargantuan change of this scale is bound to have many, undesirable consequences as well — one can imagine the kind of chaos caused by a sudden ruling to drive on the other side of the road, or creating two time zones in the country.

In the midst of all this is the common man, asking what the fuss regarding GST is all about. What does the GST do to me, she asks. Does it make things cheaper? When will prices come down? Very valid questions. The argument is very clear in the case of goods which have now been taxed at a lesser slab — eatables, some household items and others. What is not clear is how it would affect the price of goods which are taxed at a higher rate (many have been revised since the first announcement), and services.

 

Especially, in the latter’s case — services are in the 18% slab, a few percentage points higher than in the VAT regime. Theoretically, the price should have come down due to input tax credits playing a role, but the businesses have not passed the benefit to the customers. Many companies have chosen to pad up their profits with this windfall input tax credit, thereby rendering goods and services more expensive than before. Nothing exemplifies this more than the price of eating out, especially at restaurants. No matter what the rate was (varied from 12 to 18%), it felt like the bill was more expensive after the GST era.

In fact, a few days ago, the government cut the rate of GST for restaurants to 5% and withdrew input tax credit, with Finance Minister Arun Jaitley stating that the GST council decided to do away with the input tax credit as the benefit was not being passed on to the customer. Even after this, many outlets haven’t reduced their base (pre-tax) prices. It was like being at the casino — whatever you did, the house always won at the end.

With this happening, what can we hope for? Perhaps, the answer lies in competition — the last refuge of the customer.

This may seem incredible today, but many eons ago (around the turn of the millennium), mobile phone outgoing call rates were in the double-digit-per-minute realm. Ditto for incoming. Simply put, if someone called you by mistake (a wrong number call, or, perhaps a friend calling you in jest) the price to be paid was hefty. At such a time, what changed the market drastically — and turned it to an incoming-free, a phone call/text message in the range of a 50-paisa postcard realm — was the entry of Reliance. Gratitude and thanks to Sehwag ki maa are in order.

 

 

Today, we can see similar events playing out and history repeating itself in the data battlefield. Post Reliance Jio’s entry, the same mobile service providers who were providing expensive data plans are now bending over backwards and announcing unlimited calling plus generous data plans by the dozen in an effort to woo customers. No, this parable is not meant to be a paean to Reliance; it is merely to highlight the knock-on effects of competition from the standpoint of consumers.

As consumers, we should hope for a similarly hungry goods-or-services provider to drop his margins, set the cat amongst the pigeons and wait for the market to run its natural course. In the longer run, prices should fall. Until then, we can only nudge businesses by responding in the only language they understand — by voting with our feet and impacting their sales. After all, nothing catches a business’ eye more than falling revenues.

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