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GST may mean short term pain for consumers but a good bargain for brighter future: Pratik Jain, PwC written by Pratik Jain, published in The Economic Times. June 6, 2017

GST has caught the fancy of the nation, which is somewhat unprecedented for a change in tax regime. While industry is anxiously rushing to be GST-ready, consumers are looking forward to a reduction in prices.


Internationally, GST has often led to short-term inflation and that&rsquos perhaps the reason the government is working overtime to prevent widespread price increases. In this process, a clear message is being given to industry to pass on the benefit of GST to consumers, particularly in view of the anti-profiteering provision in the GST laws.


Earlier this week, the government published a list of 89 items, where the GST incidence is believed to be lower than the effective incidence of current taxes. These include edible items such as milk products, wheat, rice, oil, domestic LPG, garments and so on. It is expected that a few more of such lists will be released in the run-up to GST. The government also issued a press release, asking the real estate sector to pass on the benefit of increased input credit to customers, as the headline rate of tax visible to the buyer increases from 5-6% to 12%.


The point being made is simple: pass on the reduced rate of tax and benefit in terms of input credit to customers. As the government has followed the principle of equivalence in deciding the rate of tax, there are not many products where the rates have drastically come down, barring a few exceptions like soap, toothpaste and hair oil, where the effective rate has gone down by almost 10%.


The GST rate, by itself, may not provide any substantial relief to customers. It means that reduction of consumer prices would essentially depend on two factors: quantum of additional input credit available to industry, and the benefit in terms of reduced costs due to efficiencies in supply chain and logistics.


While the GST law does mandate that benefit of input taxes be passed on to the consumers, it may not be immediate. Take the example of real estate. For builders, input credit would only be available for purchases made after GST is implemented. However, to the extent of construction already done, consumers would have to bear additional tax of around 6% for invoices raised from July 1.


Further, for stock of goods in hand with retailers as on June 30, the benefit of entire excise duty paid is not available, which could impact consumer prices during the transition. It is not surprising that many businesses are trying to clear the stock, including high-value products like luxury cars and watches, by offering discounts. Also, the benefit of input credit is dependent on vendor compliance. It could prompt a few companies to wait for the benefit to be realised before it is passed on to consumers. This might mean that prices could fall three to six months after GST is introduced and not immediately.


GST is likely to give long-term benefits to consumers. It is transparent as the entire tax paid is visible on the invoice, provides better accessibility of products as supply chain bottlenecks are reduced and makes choices simple as there is uniform taxation in all states. Given that GST would incentivise manufacturing by reducing cascading of tax and cost of doing business, market forces will ultimately drive down the prices of most consumer products. Also, as unorganised sector shrinks, it should lead to tax buoyancy for the government, not only for GST but for income tax as well. It should then bring down the GST rates further over the next two-three years.


So GST could perhaps mean a bit of short term pain for consumers but it may not be a bad bargain for a brighter future.


(The writer is leader, indirect tax, PwC India. Views expressed are personal)