Since the passing of the GST Constitutional Bill by the Rajya Sabha in August last year, the country has been preparing itself for the new tax regime. The new GST law is India’s biggest tax reform initiative which is expected to improve compliance levels, increase government revenue, and create a common playing field for the businesses by amalgamating a host of central and local taxes.
On the face of it, GST seems to be a mixed bag with some of the necessities becoming cheaper, while the others might get more expensive. While in the longer run the Goods and Service Tax might have a favorable effect on most of the sectors of the economy, in the short run, as with the most of the reforms, the benefits seem to be limited. Based on the experience of GST implementation in other countries, India could observe an inflationary impact at the onset of the reform, which might fade away once the legislation sinks in.
Things that might get costlier:
The present rate of service tax is 15 percent and is applicable to most of the services excluding essential ones like cultural activities, ambulance services, and certain pilgrimages and sports events. Under Goods and Service Tax, this rate would increase to 18 percent making the services more costly. For some goods like edible oil, textiles, etc. the excise duty is nil and the VAT in several states is 5 percent. Hence, the total cost of such goods is close to 8%-9%. With GST, the cost of such goods is likely to increase and this might put a hole in the budget of a common man.
The Government has a negative outlook towards sin goods which includes cigarettes, tobacco products, and aerated drinks. These goods are going to be taxed at higher rates than normal, which is good for you if you have been planning to cut down on your consumption of these products. Some of the things which could get costlier once GST comes into play include:
- Restaurant and hotel bills
- Mobile bills and internet packs
- Transportation services including railways, air travel, and cab services
- Jewelry and precious metals
- Luxury cars
- Cigarettes and other tobacco related products
- Aerated drinks
- Courier and DTH services
Things that might get cheaper:
The cost of the indirect tax on goods is presently at the higher levels. This is because most of the goods such as consumer electronics, beauty products, non-luxury automobiles, etc. draw an excise duty of 12.5 percent and state VAT around 12.5%-15%. Moreover, there are several cascading taxes due to CST, input tax credit retention under the VAT regulations, levy of octroi, entry tax and other taxes imposed by the local body, during the entire value chain till the product reaches the customer.
For the manufactured consumer goods, the present tax regime implies that the consumer has to pay nearly 25%-26% in excess of the production cost of the goods due to excise duty and VAT. So, with the rollout of the Goods and Service Tax where the rate is expected to be 18 percent for most of the goods, these are likely to get cheaper. Some of the products which could get cheaper once GST comes into play include:
- Wood articles and Plyboards
- Online Shopping
- Fast moving consumer goods (FMCG) goods like processed foods, shampoos, chocolates, etc.
- Pharma products
- Branded apparel
- Movie tickets
- Paint, cement and several construction materials
- Air coolers, fans, water heaters, TVs, and other electronic items
- Solar panels, and fingerprint scanners
The Bottom Line
Goods and Services Tax, hailed as one of the most powerful tax reforms which India has ever seen, purports to do away with the multiple tax regulations on most of the goods and services. GST would change the current tax regime of production-based taxation to a consumption-based system. There is no doubt that the corporates would benefit once the GST has been rolled out; however, the advantages to the common man are still speculative. We hope that the end consumer would also reap the benefits of the new tax regime, once the business houses have transitioned completely to the new tax structure and start to pass on the benefits to the average Indian.
This article has also been published in The Financial Express