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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)

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