With Goods and Service Tax (GST) being most unlikely to be implemented from 1^st April, 2017, Mr. Arun Jaitley will have to quickly re-assess the indirect taxes rate structure in the Annual Budget 2017. As 1^st April, 2017 looks almost uncertain, the Finance Minister has clarified that since GST is transaction based taxation system, the same can be implemented from any date and not just from the beginning of the financial year. It was also stated that due to constitutional compulsion GST must be implemented by September 2017, else the right to levy the existing taxes will lapse.

The complete of washout of winter session of the Parliament due to demonetization combined with the lack of consensus among the members of GST council were key reasons due to which model GST law could not be approved and hence the rollout of the same became difficult 1^st April.

Besides the clearly defined road map for GST roll out, the government may take initiatives to bridge the gap between the current tax rates vis-à-vis the probable rate in GST so that the negative effect of inflation on introduction of GST can be managed. The inverted duty structure is likely to be further rationalized. The government may also propose the transitional provisions in the existing indirect tax laws which will apply upon introduction of GST. 

Due to multiple GST rate structure (being 0%, 5%, 12%, 18% & 28%) agreed for different goods and services, it is quite apparent that the GST may not be introduced in its purest form in India, i.e. there should be uniform rate of tax for all gods and services. The current approach and speculations around GST rates and its implementation date have left the common man worried about how this paradigm shift in the taxation structure is going to impact his pocket. States have sought higher proportion of the revenues than 50%, which also lends an element of uncertainty to the ongoing budget process. In addition, excise exempt items as of now exceed those exempted under the proposed value added tax. A large number of services, which could also come under the ambit of GST, too are currently tax free.

Beginning with the very basic necessity, i.e. food it could be fairly expected that the items such as milk, food grains, vegetables, etc  will be exempt under the GST. For other essential items such as edible oil, tea, spices, packaged food items etc. the GST rate may likely be 5% based on the recommendation of the GST Council. However the overall impact will be neutral as compared to the current taxes on such products.

As far as medicines are concerned, the consumers may not feel the heat as long as it is continued to be taxed at concessional rate of 12% under the GST regime. The life saving drugs can be expected to remain exempted or taxed at 5%. Further the consumers may also face a decline on their medical bills if the pharmaceutical companies pass on the positive towards GST in the form of reduction of tax cost.

To turn the Prime Minister’s goal of ‘Digital India’ into reality, the impact of GST on the basic modes and source of communication, i.e. mobile and internet services needs to be assessed. As mobile handsets are currently taxed at the concessional rate of approximately 7% (Excise + VAT), any increase in the same could provide a break in the progress of this initiative. Hence the government should consider try to keep rates on low-cost handsets within the bracket of 12%. Speaking on the same line, the rate of tax on internet services needs to be lowered from present rate of 15% to 12%. Relying on these likely tax rates on mobiles and internet services, may see more citizens contributing to the goal of ‘Digital India’.

Speaking of cars, which is now becoming one of the basic necessity of the middle-class population of India, the same is expected to be kept in the highest bracket of tax i.e.28%. Also cess will be applicable above the 28% tax on luxury goods, aerated drinks and tobacco products.

The basic services such as saloon, tuition, gymnasium etc. consumed by common man would is likely to become costlier as the rate is expected to increase from 15% to 18%. However, if the benefit of additional tax credits (VAT paid on goods used by service provider, Central Sales Tax (CST) etc.) is passed on to the end consumer, the services are likely to become cheaper if not costlier.

GST appears to be a mixed bag with certain necessities getting cheaper, while the others are likely to disturb the common man’s pocket. Having said that, the economic history of various countries suggests that while introduction of a VAT in the form of GST has seen an inflationary trend in the initial 1 – 2 years, eventually the market competition and dynamics are bound to take control and force businesses to pass on the benefit to the consumers resulting in overall growth in the economy.

The anti-profiteering provision contained in the model GST law also refrains businesses from making unlawful gains under the GST, and if necessary can be used to help to ensure that the fruits of the GST is passed on to the consumers.

Thus, as India prepares for the biggest tax reform in the indirect taxation structure of this country, the task for the government is already cut out of not only to ensure smooth transition into the GST regime but also ensuring that it lives upto the expectation of industry and common man of making goods and services available and affordable.

 

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