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Will Dual GST be Revenue Neutral to Consumers?
By
S.Sridharan
Principal Consultant, STVAT Consulting
With Set off of Tax paid on Inputs and Input Services GST undoubtedly will benefit Manufacturers and Traders.
Will Trade and Industry pass on the benefits to the consumers. If not, should there be a mechanism to ensure that benefits are passed on to consumers.
Sridharan draws attention to the Australian Initiative and calls for a debate on the issue
The belief that trade and industry would benefit from implementation of GST is widely accepted. It is believed that industrial productivity and earnings would improve, more investments would happen and GDP would get a boost.
The State and Central administration concerned with protecting revenues is hotly debating on what would be the revenue neutral rate. In the entire din on GST, it appears that forgotten stakeholder is you and me who would be bearing the burden of the tax. There is no official word on how GST would benefit the consumer. It appears that the effect of GST on prices has so far not been deliberated by the empowered committee.
Revenue neutral?
Will GST be revenue neutral to the consumer or will it be inflationary? The immediate effect on prices depends on the combined rate of CGST (Central GST) and SGST (State GST). Based on international experience it is expected that the price change in either direction would be a one time blip and there would not be any ongoing impact on the rate of inflation.
Alan A.Tait in his study for the IMF (Value Added Tax: International Practice and Problems) had observed, “Most Governments and the public anticipate with trepidation the effect on prices of introduction of a value added tax. However, the evidence shows that in most countries, the introduction of VAT, or a change in VAT rates, is not inflationary; the change might lead to a once and for all shift in prices, but not to an acceleration of price changes.”
In the absence of definite information on what would be the combined rate of CGST and SGST it is difficult to hazard a guess on the direction the CPI (Consumer Price Index) would move on implementation of GST in India.
Besides, the direction of movement of CPI would not be a correct index to gauge if the consumer has benefitted. CPI is only a very broad indicator and depends on various factors like composition of goods in the Index, the overall growth rate of the economy, Consumer confidence, money supply and so on.
CONSUMER PRICE INDEX MOVEMENT
When State VAT was implemented in 21 States in India from April 2005, the consumer price index had come down from 5 per cent in April 2005 to 3.7 per cent in May 2005 and further to 3.3 per cent in June, 2005. Does it mean that the consumer has benefitted? May not be so.
Dr.Asim Das Gupta while commending the fall in CPI in April-June 2005 observed, “But the (empowered) committee is concerned in cases where prices have risen even after reduction in VAT rates compared to sales taxes. Index is an average concept. Prices of some commodities have risen. We are particularly concerned about those commodities, where prices have gone up despite reduction in VAT rates''. Dr.Asim Das Gupta added that the panel had requested finance ministry officials and other ministries concerned to hold meetings to monitor prices of VAT commodities. On passing the benefits by manufacturers to the next stage, he said it is not happening countrywide. (ENS ECONOMIC BUREAU Posted: Aug 25, 2005)
How much would manufacturers benefit on implementation of GST? Dr. Kelkar has estimated that even a 2% reduction in costs of manufacturing sector will help increase in profits by more than 20%. He added that this will attract more investment and that the only way of reducing prices is by passing on the benefits of reduced cost to the consumer. (BS Reporter / Bangalore October 13, 2009)
Will the manufacturers pass on the benefits of GST to the consumer? If not, should it be ensured that the tax savings on implementation of GST is passed on the consumers?
AUSTRALIAN INITIATIVE
The Australian initiative on ensuring that the consumer is not exploited is interesting. When Australia implemented GST in the year 2000, A New Tax System (Trade Practices Amendment) Act 1999 inserted Part VB in the Trade Practices Act 1974. The Australian Competition and Consumer Commission (ACCC) was vested with transitional powers for the period from 1 July 1999 to 30 July 2002 to monitor prices in order to prevent the possibility of consumer exploitation and excessive profit taking in the transition period after the introduction of the GST. The monitoring was intended to identify instances where customers have not benefited fully from reductions in tax rates or have otherwise been exposed to greater than necessary price rises.
Price exploitation occurs under section 75AU of the Trade Practices Act where a business:
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makes a supply between 9 July 1999 and July 2002; and
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the price is unreasonably high having regard to the introduction of GST (whether the supply took place before or after those changes) and
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the price is unreasonably high having regard to supplier's costs, supply and demand conditions and other relevant matters.
The ACCC issued a document titled "Price exploitation and the new tax system" which detailed the general principles, information and guidelines on when prices contravene section 75AU of the Trade Practices Act 1974
Click to View section 75AU of the Trade Practices Act
The ACCC also published maximum price notices for particular goods / services. If an entity supplied goods /services at a price greater than the published maximum price, the entity was regarded as having engaged in price exploitation. Penalty was prescribed for price exploitation or misleading and deceptive conduct. The ACCC also conducted nationwide consumer awareness campaign on how GST would affect prices.
An innovative strategy was requiring entities with turnover in excess of $ 100 million to submit Public Compliance Statement recording its commitment to abide by the provisions of the Trade Practices Act. The compliance Statement included commitment of passing through to consumers any net cost benefits realized as the result of the New Tax System. The commitment required the companies to identify cost savings and reflecting these savings in pricing decisions. The Public compliance statement signed by the CEO, on approval by ACCC, was placed on the public register.
Click to view a specimen Public Compliance Statement
Another school of thought would be that Government should not seek to dictate or regulate price and that entities should be allowed to make pricing decisions based on market demand and supply equilibrium. True, over a period of time demand supply mechanics would operate and an entity that indulges in profiteering on tax savings would be forced by competition to moderate the pricing.
CANADIAN VIEW
This was the pitch of the Business Council on National issue, in the Statement on the implications for inflation of the GST, before the House of Standing Committee on committee on consumer & corporate affairs and Government operation, Canada when HST was implemented in Canada.
Should India follow the initiative of Australia, a country with population just around that of Mumbai or let competitive dynamics discipline pricing decisions? It is worth debating.
06/06/2010
The articles in Editor's page is based on inputs available on the date noted and is to be read in that context. The articles are usually not updated for later development. |
