Nifty99000 100%

Sensex99000 100%

Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
RSS

News

Will GST really spike up your bills?

Author: S Vijaykrishnan/Wednesday, June 7, 2017/Categories: TRACKING THE GST

Will GST really spike up your bills?

The government’s announcement of the rate fitments under the Goods & Service Tax (GST) regime have created a lot of brouhaha over how the common man’s bills are set to rise. But before arriving at any generalisation, it is necessary to understand the reason why the GST rates have been fitted as they have been.    

Experts that the Finapolis spoke to say that a tax regime always works to lower the gap between rich and poor, which results into a higher tax on goods/ services consumed largely by the high-income group bracket. The other challenge for the government was to set rates in a manner that doesn’t affect the exchequer’s revenue in the post GST era (i.e. in a revenue neutral manner).  

Saurabh Gupta, Chartered Accountant, Gupta Saurabh & Co told the Finapolis, “The government had the option to prescribe a single GST rate for all products, but this would have resulted in high inflation, defeating the GST’s basic principles. Though a one-two GST rate structure followed in many countries sounds simple, a four-slab structure with cess on luxury goods seems to be a right fitment for the progressive Indian economy.”

Another key point to note is that the government has merely declared the rates and not ‘notified’ them yet, Gupta added. Reports indicate that the list of rates announced in the May 18-19 meeting may undergo some changes at the GST Council’s next meeting on June 3. 

“Even if the final tax rates are slightly higher, they will not affect demand. Consumers will buy a good/ service if it is essential. However, the overall impact of the GST regime will be positive for the end-user. Only those luxury goods will bear a higher tax burden,” said Gupta. He added that it is highly unlikely that the GST Council will go back on the rates set, as they have been decided on a consensus basis.  

Almost 90-95% of the rates announced will remain unchanged. There may be a change in rates where there is any specific representation, Gupta believes. Already the government has received representations from several industry bodies, including those of telecom, cinema, etc to reconsider the GST rates: while an 18% rate has been placed on the telecom industry, Cinema has been elevated to the status of a ‘luxury’, attracting a 28% rate, as opposed to a rate of 15% earlier.

“It is highly unlikely that the final rates will vary from state to state. However, using the GST rate alone, it is difficult to assess the impact on the common man’s bill based on the GST rate alone. It must be noted that the cost of inputs for goods/ services in various sectors are quite different. Ultimately, most goods/ services will become cheaper as the industry will pass on the benefits that they receive under the input tax credit to the end-user,” said Gupta.   Players who understand how to pass on the input tax credit will be more competitive and preferred by consumers. “To top it all, the anti-profiteering clauses of the GST law will compel the suppliers to pass on the tax benefits to end consumer,” Gupta said, though adding that enforcing the clause will be difficult and subjective for government officials. 

“Nevertheless, in any case the industry has to pass on the savings they earn under GST to consumers to stay competitive. Thus, the anti-profiteering clause may not make much of an impact except in cases where there is a monopoly,” said Gupta.

How did current rates influence the GST rate card?
The current tax regime has a host of taxes — excise duty, central sales tax, octroi, entertainment tax, value added tax (VAT), etc. While aiming at eliminating multiple taxes and also the cascading effect, the government has largely tried to keep GST rates lower than the current tax rates. Most white goods are currently subject to excise rate of 12.5% plus VAT of 14.5% which adds up to 30-31%. In comparison, under the GST, the highest slab is set at 28% for certain categories of white/ luxury goods, while a large section of goods/ services have been moved under the 18% slab.

Are services getting costlier?
While the government outlined the GST rates for services across 35 categories, it has fixed the rate for a majority — or All other services not specified elsewhere —at 18% (with input tax credit), which is higher than the current rate of 15% (including cesses). 

However, Gupta says that is unfair to conclude this as a hike without understanding the tax efficiency in GST era, which is the result of the input tax credit. He illustrates using the example of a saloon. “In the current regime a service provider isn’t able to take credit of tax paid on input goods used for providing the services.” 

In the saloon example, assuming that a facial costs Rs 1000 + taxes and the inputs cost Rs 300, without a input tax credit, the saloon makes a profit of Rs 662.50 (after deducting Rs 37.50 as the input tax (on which there is no credit). However, post GST, even at an 18% rate, the saloon receives full ITC and is able to pass on the increase in profit as savings to customers. Considering the 3% extra tax on output paid by the customer, one still receives a benefit of Rs 7.50 (see table 1 below).

Cost of a facial (All figures in Rs) Pre-GST Post-GST
Basic Price 1000 1000
Tax% 15% 18%
Tax amount 150 180
Invoice Price 1150 1180
     
Raw material used in facial by saloon 300 300
Tax rate on raw material 12.50% 18%
Tax amount on raw material 37.5 54
     
Input eligibility of tax paid by Saloon on cream 0 54
     
Profit of Saloon 662.5 700
     
Savings, which Saloon can pass on to consumer post GST   37.5
Extra tax paid by Consumer   30
Final GST benefit to consumer   7.5

 

Thus the effective rate of taxation gets lowered due to tax efficiency and one must not go by the rate alone.

(A version of this article originally appeared in the June 2017 print edition of the Finapolis. Click here to Subscribe)

Print Rate this article:
No rating

Number of views (174)/Comments (0)

S Vijaykrishnan
S Vijaykrishnan

S Vijaykrishnan

Other posts by S Vijaykrishnan
Contact author

Leave a comment

Name:
Email:
Comment:
Add comment

Name:
Email:
Subject:
Message:
x

Videos

Ask the Finapolis.

I'm not a robot
 
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
 
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above
Want to Invest
 
 

Categories

Disclaimer

The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free