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GST and the Consumer - Outside View by Nitin Gregory
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GST and the Consumer
Aug 18, 2016

The GST has been in the headlines for a few weeks now. Many discussions centre around how some products will become cheaper (tax on tax will be removed). Others talk about what is set to get costlier (services could go up). To be honest, the picture is still a bit muddled.

Nearly 160 countries have implemented a goods and services tax. Yet there is no clear case to link a secular price decline to this regulation. Discussions about growth and GDP points are even more contentious. We will try to understand the long view - but before that, a little context...

What is GST?

The goods and services tax is a common national tax that would replace many indirect taxes. Currently, the Centre taxes the manufacture of goods (excise tax), services (service tax), and inter-state sales (Central Sales Tax). State governments further tax the sale of goods within their jurisdiction (VAT). GST will replace all of these. There will be a few exemptions - e.g. alcohol for personal consumption, petroleum, and import-related customs duty.

How will the consumer benefit in the long run?

The biggest benefit of GST is not simplification. In other countries, the GST is a single rate. In India the GST is divided into three components - CGST, SGST, and IGST (Centre, state, and Inter GST). In fact, the IT industry is dealing with a potential increase in complexity. Today, services like software are taxed only by the Centre. So GST might mean software service providers will have to pay tax in each state and to the Centre!

The real benefit comes from a 'level playing field'. A common floor tax across India means that the most efficient producer will win the consumer.

Taxes like the CST can make the final product inefficient in other states. For example, if a XYZ bicycle manufacturer in one state transports steel tubes to a neighbouring state for frame welding and assembly because the lowest cost welder is there, he attracts an interstate tax. The welded and assembled frame would then need to repurchased, fitted with all the moving parts, and branded in the manufacturer's home state. This would incur another layer of tax.

If you eliminate these two layers of tax, the lowest cost producer is XYZ Ltd. Today, the consumer cannot benefit from the competition XYZ Inc brings to the market. The common GST rate will remove this shield that inefficient manufacturers are enjoying.

This does not always mean higher sales for XYZ. It can play out in many different ways. Other producers will have to become more efficient to remain in the game. Producers might resort to value-added features to attract customers. In other words, to protect their castle, producers will have to work harder.

The undoubted benefit of GST will be a 'single Indian market' where free market forces are allowed to work without distortions to the value chain. This is bound to benefit the consumer over the long run.

The logistics industry is set for some big changes. The elimination of interstate taxes means movements do not have to be 'stock-transfers'. Representative warehouses in many states will be scrapped in favour of consolidated warehouses in fewer states. So the average warehouse size is set to jump, which means more efficient storage as the fixed cost of running a warehouse can be distributed over a larger volume. Again, the removal of tax layers will allow the most efficient supply chain to flourish.

Why is GST contentious?

GST is a destination-based tax. Manufacturing states lose revenue. All SGST will accrue to the state where the goods or services are sold. In the case of finished goods being exported to another state (no onward sale), the exporting state will have to credit any state 'GST' to the Centre if there is an input tax credit claimed against IGST. This is a significant disadvantage for manufacturing states.

The online administration of this tax raises questions for small businesses. A large number of businesses in India fall under the unorganised sector. Including them will be a challenge.

The GST still has a few hurdles to go through. It has huge symbolic value and some obvious benefits, but much remains to be seen.

If you would like to dig deeper into the practical implications of GST and learn the likely rates at which various goods and services will be taxed, I strongly recommend you download Vivek Kaul's free report, What the Mainstream Media DID NOT TELL YOU about GST.

This column is authored by Nitin Gregory. Nitin, who graduated from IIM-Calcutta, is currently pursuing a finance role with an automotive major. He has a deep interest in Macroeconomics and pens a blog at Gregonomics.

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2 Responses to "GST and the Consumer"

KD

Aug 19, 2016

This reminds me of quote by Nani Palkhivala: "The tragedy of India is the tragedy of waste-waste of national time, energy and manpower. Tens of millions of man-hours, crammed with intelligence and knowledge-of taxgatherers, taxpayers and tax advisers-are squandered every year in grappling with the torrential spate of mindless amendments. The feverish activity achieves no more good than a fever"

Have you ever seen any any CA who is unemployed in India? We need more CAs than engineers.

Like 

James Gregory.

Aug 19, 2016

The impact of GST on prices can be any body's guess!.The write up gives short but different view on the possible outcomes on prices which is interesting!.

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