India’s GST: a mere drift in consumers’ mind or impact on pockets?

By Anita Rastogi|25th May 2017
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In order to understand the new GST regime's impact, we must understand where a consumer is placed in the GST chain. 

Ever imagined an industry without a consumer? All units produced and warehoused but not sold is something which no trade and industry would ever want. It is not farfetched to say that more than machines and employees a business needs consumers. This article intends to analyse the impact of upcoming Goods and Services Tax (GST) on consumers. But before we proceed further let’s understand where a consumer is placed in the GST chain and how it will get impacted.

A consumer might not be required to do anything under GST, and is also the last person in the value chain involving supply of goods and services, but all this tax transformation is undertaken for his betterment only.

There is an interrelationship between a consumer, business and indirect taxes. One of the leading revenue generators to the government is indirect taxes, a tax that is collected and deposited by a business, but eventually passed on to the person who bears the ultimate economic burden of the tax (i.e., the consumer). The price paid by a consumer for goods and services have following three unnoticed components (other than market forces that are governed by various external factors):-

S.No.Element in priceControlled by
1Cost of inputs/raw materialLargely depends on business decisions, what to procure, from where and of which quality. Indirect taxes play a limited role here, as the inputs or raw material will also have an indirect tax levied on them
2Profit marginSolely a business decision
3TaxesSolely governed by applicable scheme of taxes on such products, services or industry

A change in any of the above components will certainly birth a variation in price of goods and services. Aside the profit margin and quality-related decisions, from a tax perspective implementation of GST (amalgamation of existing indirect taxes and cesses) will have a critical role in price determination.

Now, when we have captured the significance of indirect taxes in pricing of commodities, we progress to list down the impact of GST on consumers. India’s larger consumer base is a price elastic consumer, and any change in the price leads to demand and consumption volatility. Few of the key impacts of GST on consumers could be as follows:-

Impact of GST on consumers

  1. Reduction in price of goods and services, how?

The present scheme of indirect tax results in cascading effect of taxes, and thus in certain scenarios the taxes paid on procurements are not available for setting off the output tax liability. This leads to formation of a tax cost and rise in price of the commodities. The GST implementation is expected to curb this cascading effect, and provide a seamless credit to the supplier of goods and or services. In turn, there will only be a tax on value addition and no business costs in terms of taxes paid on procurement of inputs, input services, or raw material.

Thus the net amount of indirect taxes implanted in the value chain will be less, thus price of goods and services will be expected to be relatively less in ordinary scenario. Due to incorporation of anti-profiteering provisions, businesses will be bound to pass the benefits (on account of GST implementation) to the consumers. The final announcement on fitment of commodities into proposed multi-tier rate structure along with tax rate for services will happen next month (May), post which one will be able to sense the real reduction or inflation in prices.

  1. Uniform prices throughout the country

Today, we have Value Added Tax (VAT), which is levied on sale of goods and administered at state level. Under the VAT laws, there are Schedules which outlines the tax rate on commodities with their brief description. This description and fitment may vary from state to state which leads to price variation. Besides this, there are certain local taxes and duties (such as entry tax) which are levied only in identified states. With GST coming in, all these complexities will be ironed out, and there will be uniform prices across nation. Implementation of GST is most commonly echoed as ‘one nation, one tax, one market’.

  1. Transparency in tax structure

As a matter of consumer right, he is entitled to be of information including taxes and duties relating to products and services that he consumes. The kind of efforts that government is taking to educate the masses, it will create awareness amongst the consumer regarding the proposed GST structure and its transparency measures. A major change would be elimination of MRP-based taxation, where consumer was never aware of taxes inbuilt in the price of commodities. Also there will be an end to dual taxation (levy of service tax and VAT at the same time), which is prevailing today in software and restaurant sector.

  1. Certain goods to be costlier in the name of cess, and service will be taxed at a higher rate

GST will have minimum exemptions. The existing benefits will be grandfathered under GST only where necessary and it is expected that few of the exemptions and tax holidays will be put in their sunset mode. Removal of such benefits, may burn a hole in the pocket of consumers as they have to bear an economic burden of tax cost (GST), which businesses will pass through to them. Further, the government has introduced a levy of cess on certain goods (tobacco products, coal, aerated water, motor cars), to be commonly be known as ‘compensation cess’. This charge of additional ‘cess’ will make these goods costlier than the existing prices. Also the services are expected to be costlier by three percent, and the rate under GST may increase to 18 percent.

  1. Better accessibility of goods and services

The implementation of GST will provide numerous business opportunities to decide on warehousing and logistics. It is expected that there will be a better accessibility of goods and services under GST, as the consumer need not travel across states for making a purchase to save tax. Further, the online shopping companies will plan their operations to reduce the lead time, while managing the warehousing facilities, which today are contingent on filling complexities of present tax structure.

Conclusion

As a consumer, one is eagerly waiting for announcement of tax rates and proposed list of exemptions. Using which, he will apply a gross mathematics and decide on his major purchases during this transition period. Say, motor cars are expected to be expensive in GST, a consumer will look forward to buying the same before GST kicks in. Indirect taxes will follow the consumer, no matter in what name and shape, and he (consumer) will have an inevitable encounter with them as an essential element in price of goods and services. What an informed consumer can do is be aware of applicable taxes on his purchase.

Preetam Singh, Consultant – Indirect Tax, PwC also contributed to this article.

In the run-up to one of the biggest tax reforms in the country, the market is abuzz with new rules and guidelines about the Goods and Services Tax (GST). How will GST really impact your business? How will your financial reporting change? Find out the answers to all this and more, directly from industry and tax experts who will share their expertise on YourStory’s new series ‘IndiaonGST’.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)