GST making you anxious? Here is a fact-check on how new tax will impact you

The shelf prices of most commodities are likely to see a change over the next few weeks

GST is finally here! It has caught the nation’s fancy, which is somewhat unprecedented for a change in the tax regime.
 

However, despite all the efforts made by the government to demystify GST, people continue to be anxious (and confused) about whether GST will be a game-changer for every household in India.  My aim is to give a thumbnail sketch of the potential after-effects of GST, and hopefully alleviate this anxiety or confusion a bit!

From consumers’ perspective, pricing will probably be the most important parameter for evaluating the success (or otherwise!) of this mega reform.  On this front, GST could turn out to be a mixed bag in the short run. The shelf prices of most commodities (and not necessarily their MRP) is likely to see a change over the next few weeks.  And while some products such as soap, toothpaste and hair oil are likely to be cheaper, others, including aerated beverages and some consumer durables, could be more expensive.  So if you see the same product with a different MRP tag at a store, don’t doubt the integrity of the retailer or the quality of the product – it’s the GST effect!  

Retailers may have a tough time convincing consumers about prices. So some dope on GST on standees or pamphlets should come in handy.  

There is also the psychological aspect of this transition for people.  As consumers, we are used to seeing only VAT (generally between 5% to 15%) on our bills for products we buy.  What we don’t see are the other hidden taxes such as Excise Duty and numerous other tax components, which are embedded in the prices of products.  Going forward, when retailers print 18% or 28% (or even 40% GST in some cases) on invoices, it may hurt consumers’ sentiments, and may even adversely affect the perceived value of the products in their minds. So, rather than blindly succumbing to the myth that taxes have increased substantially under GST, do try to appreciate the fact that even before GST, the ‘visible’ VAT (along with all the ‘hidden’ taxes in products’ prices) could add up to or exceed the new ‘transparent’ GST rate!  Remember, what is important is to stay focused on the total prices of products (including taxes) to make a rational comparison between then and now.

As for services consumed by an average household, prices are expected to remain constant or increase only marginally.  This is because while the standard GST rate on services will be 18% vis-à-vis the 15% Service Tax earlier, service providers will be able to avail additional tax benefits (credits) on the various products they source to run their businesses. In fact, these tax benefits could outweigh the increase in tax rates in some cases (or example, for restaurants), and actually translate to a reduction in the total price for consumers.

The real benefit of GST will be visible in the medium to long term (over the next 12 to 18 months) when the new regime will have stabilised, and suppliers begin to focus on realising operational efficiencies the new system is expected to usher in.  In this context, restructuring of supply chains and business in general should help to reduce prices further.  

Moving from the monetary aspects, there are some other important areas where GST will affect or influence people’s behaviour.  Consumers’ choices in terms of which state they should one buy from, whether they should wait till the Budget to buy new cars, whether they will be able to order products online, etc., will become much easier as taxes become uniform in all the states, budgets become a non-event (hopefully!) as far as indirect taxes are concerned and state barriers become minimal.

GST would also become a critical driver for consumers to adopt technology or digitisation at all levels.  And with all tax compliance requirements mandatorily going online, small businesses will have no choice but to accept the fact that technology is an integral part of their businesses.  

Technology will also bring in enhanced transparency and reduce touch-points with tax authorities, which, in turn, will have a direct bearing on the prevailing corruption and other malpractices in this space.    This will cheer up honest taxpayers, who can expect a further reduction in the tax incidence in the long run due to widening of the tax base.    

The Government has been trying hard to explain the nuances of GST to us through various channels.  However, what is critical is consistent messaging, because there have been some recent instances where consumers have been exposed to conflicting views about the impact of GST on certain products and services.  For instance, while comparing pre-GST tax rates with GST, one should only factor in taxes that apply pan-India (Excise and VAT), rather than add taxes that are confined to only a few states (e.g., Octroi).  And adding regional taxes could be misleading, since consumers expect prices to come down under GST, whereas in actuality, manufacturers may increase prices in view of its pan-India impact.  

So let’s keep faith!  India is not the first country to implement GST. More than 100 countries have successfully adopted GST, which is considered the best form of indirect taxation.  And although with our federal structure, we will perhaps take more time than other countries for this mega reform to stabilise, the end result is likely to be worth the wait and pain. In any case, remember that market forces and the anti-profiteering mechanism put in place by the Government will ensure that the real benefit is passed on to consumers sooner rather than later!  

(The writer is leader indirect tax and partner, PwC)