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The goods and services tax (GST) is set to be rolled out from 1st July, after the Centre and the states reached an agreement on the contentious issue of the sharing of administrative powers.
Thanks to GST, for the first time in 60 years, the whole country will hopefully come together as a single market, bringing major economic gains.
This also gives Indian industry much-needed clarity and additional time to prepare for the indirect tax reform. Finalizing the rollout date helps the government incorporate GST revenues in its budget calculations.
In fact, in the post-demonetisation scenario, the GST delay has ended up being a good thing for both, the Centre and the states. The Indian economy is already having a tough time with the manufacturing and services sectors having taken a hit.
Under the proposed tax regime, 90% of all assesses with a turnover of Rs 1.5 crore or less will be scrutinized and audited by state authorities; the remaining 10% by the Centre. Above that limit, the Centre and states will assess in a 50:50 ratio.
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One of the important clauses in the GST is anti-profiteering, which ensures that the GST benefits/credits are passed on by the companies/vendors to the customers. However, the clause lacks clarity and may result in a turf war among suppliers along the manufacturing chain.
Interestingly, large manufacturing companies/Original Equipment Manufacturers (OEMs) have already started demanding price cuts from vendors on the account of savings from the GST.
An article in the Economic Times notes that these companies have already calculated the exact jump in the vendor margins, and want it passed on to them. They expect suppliers to reduce their price by anywhere between 2-10% as GST would benefit them.
The large OEMs have the ability to coerce their suppliers into reducing prices, however, how much benefit these OEMs would pass on to the end consumers is still debatable. As said, there is no clarity about how the anti-profiteering clause will be governed.
Mind you, the OEMs are all prepared to ride on the dual benefits of the GST i.e. benefits from the suppliers and benefits on the account of their own business operations. It would be interesting to see how much is actually passed on to the end consumers.
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