The Goods and Services Tax (GST) is being discussed like never before and rightly so. As hopes of the Bill's passage in the Rajya Sabha draws nearer, so does its implementation. It is being billed as a landmark tax reform since Indian independence.
But, what is in the GST for the common man?
To begin with you have to understand the plethora of taxes in the system. Let's say a product that is priced at Rs 200 comes out of a factory. You have the immediate effect of sales tax and excise duty on that depending on the type of the product. The cost escalates to Rs 240 (approximately).
Then you have the state governments which would levy a value added tax. This translates into the cost working to around Rs 264. According to rough estimates the cost can escalate to as much as 25-30 per cent.
Now, if the GST is implemented anybody who pays a tax on input goods, it will be set off against the final products. Essentially, there is a tax credit.
So, the final product is expected to be much lower for the manufacturer. Now, if he passes on the benefit by reducing prices, the consumer will gain. However, not many are sure, it could happen and it really depends on the GST rate. Many analysts believe that a GST rate of around 20-21 per cent, would be inflationary.
In fact, there is a belief that the Goods and Services Tax could be inflationary in the first few years. Now, if the GST rates are capped lower, we end-up having other problems. The worry is that if the GST rate is capped at 18 per cent as most are suggesting, including the Congress Party, sin products would be taxed lower. So, luxury products, alcohol and Cigarettes may end up becoming cheaper, if the rate is lower.
Coming to services, if the GST rate implemented at 18%, services would become more expensive, since the service tax presently is slightly over 14%, including the recently levied Swach Bharat Cess. So, you may have to pay more for telephone bills, airline tickets and eating out. So, it is not a win-win situation entirely.
In Australia when the GST was introduced in 2000, the economy contracted in 2001, for the first time in 10 years. While many are gung-ho about the GST, in several countries it took time to reap the benefits. However, one cannot say with certainty, that it would reduce prices and benefit the consumer. It all depends on the GST rate, inter state levies and the producer passing on the benefits of lower taxes to the consumer.
As of now, what one can say with some certainty is that it will add to transparency, better governance and reduce incidence of tax avoidance. For the consumer, at the moment it seems manufactured product prices may dip a little, while services would definitely be higher.