The proposed goods and services
tax (GST) regime, slated to be introduced from April 1, 2016 will be a paradigm
shift from the present taxation model to an advanced one. While GST is flaunted
as the single largest indirect tax reform that will boost India’s GDP, its
impact on the consumer is less talked about.
Under the GST regime all major
indirect taxes — central excise duty, service tax and additional duties of
customs at the central level; value-added tax, central sales tax, entertainment
tax, luxury tax, octroi and lottery tax at the state level — will be replaced
by a ‘dual GST’. The centre will administer the central GST (CGST), and the
individual states will administer the state GST (SGST).
GST is expected to have a far
reaching impact over trade and industry as its introduction will result in
abolition of multiple taxes, removal of cascading effect of taxation and
fostering a common market across the country.
GST will be charged at each stage
of value addition and the supplier will be able to offset the levy through a
tax credit mechanism. However, GST being an indirect tax, the ultimate burden
has to be borne by the consumer. The tax content in the final product or
service price would therefore determine the impact of GST on the consumer.
Probably, GST on goods will
comprise of at least two nominal rates apart from specified goods that would be
exempt. Currently, we have an excise duty
of 12.5 per cent on majority of goods (lower rates of six per cent on some) and
a VAT rate of 4-5 per cent for merit goods and 12.5-14.5 per cent on other
goods. Thus, the total tax incidence for goods could range between 10 per cent
to over 25 per cent. Services are presently taxed only by the centre at 12.36
per cent, that will to be subjected to 14 per cent with effect from June 1
Since, with the introduction of
GST all these rates will blend into two rates (lower rate and standard rate),
there will be a positive or negative impact on every product. It is also
expected that the excise exemption, which apply on 300 product categories, will
be pruned to around 100 to match with the exemptions under the state VAT
Further, the Constitution
amendment bill which is pending Rajya Sabha clearance also proposes to impose
an additional tax of one per cent on supply of goods in the course of
inter-state trade for an initial period of two years of operation of the GST
regime, which will be assigned to the state from where the supply originates.
Since, no credit will be available for the additional tax, it will add to the
cost of goods. If the goods are sold/stock transferred to 2-3 states before
their final sale there will be an additional impact of 2-3 per cent on this
In spite of the fact that the tax
incidence on some goods might rise due to the increase in the effective rate,
businesses are bound to gain due to free flow of credits, no tax cascading and
lower compliance costs under GST. Presently, no credit is available for CST,
while in the proposed regime businesses will be able to avail credit of IGST on
inter-state supply. Trading houses are expected to gain as they will be able to
avail credit of CGST as against the excise duty that currently forms part of
the cost of their product.
The question whether the end
consumer of goods will benefit from GST depends on the rates of dual GST and
how soon the businesses will pass on the not so visible benefits of cost
reduction due to increased credit availability, no cascading of taxes and lower
cost of compliances to the end consumers.
The service sector will be
adversely affected under the GST regime. Presently, services are taxed only by
the centre. Under the GST regime, services will be taxed by the centre and the
states, leading to multiple compliances and consequent increase in compliance
costs. More importantly the rate of service tax is expected to be much higher
than the present level. As consumers of services, one will feel the heat
directly by way of increased telephone bills, higher cost of dining in hotels,
increase in air travel cost, and increase in costs of almost all services
consumed. Most of the services are taxed under the negative list regime and
will continue to be taxed under GST as well, albeit at a higher rate.
While for the consumers of goods
it will be a mixed bag, for the service consumers, the impact of GST is
expected to be adverse. As to how the proposed GST will impact the ultimate
consumer will depend amongst other factors, on the rate of dual GST.A moderate
standard rate of GST at around 18 per cent for goods and for services at a
lower rate of 12-14 per cent, same as applicable for merit goods is what the
industry is looking forward to. At these rates the end consumers would not be
impacted much, but at the same time the government revenues are expected to go
up due to better compliances.