India Economy

GST changes: All show and no go

TCA Sharad Raghavan | Updated on July 29, 2018 Published on July 29, 2018

The benefits arising from some GST Council decisions are at odds with what the claims made

The decisions taken by the Goods and Services Tax Council during its latest meeting are all positive in terms of easing the tax burden on consumers and simplifying the returns-filing process for small businesses. However, as with many government announcements, the quantum of benefit arising out of some of the decisions are at odds with what the claims made.

Not what it seems

Take for example, the ‘women-friendly and progressive’ move to exempt sanitary pads from GST. This is a classic case where a lack of clarity on concepts has led to incorrect claims. Most of the advocates for such a change believe that the price of pads will now come down by 12 per cent. This is not true, given how GST is structured. The fact is that products exempt from GST are also ineligible for input tax credits. So, while the output tax has certainly reduced, the input tax burden on companies manufacturing these pads has increased.

The companies — two of which account for 86 per cent of the market share for pads in India — would likely want to maintain their profit margins at the same levels as before the rate cut was announced; so the decrease in price for the consumers is likely to only be a few rupees. It might have been better if the tax on the pads had instead been lowered to 5 per cent, with the benefit of input tax credits. But this would mean an inverted duty structure, where the input tax rates would be higher than the output tax rate, which also would have meant a minimal effect on the final price of the product.

Revenue impact

The government has also been deflecting questions on the revenue impact of its rate reductions on a number of white goods such as washing machines, fridges and other kitchen appliances (from 28 per cent to 18 per cent), by saying that the increased demand due to the price reduction would mean the overall tax revenue from these products would remain largely unaffected. This, too, does not make much sense.

Companies manufacturing these products have said they would reduce their prices by 7-8 per cent, which is pretty standard for the 10 per cent tax rate reduction. So, just for argument’s sake, let’s take the cheapest washing machine available on Flipkart, at ₹4,500. An 8 per cent price reduction works out to a new price of ₹4,140. This probably makes all the difference to a poor family. But they are also likely to get an equal, if not greater, discount if they just wait to make their purchases during the festive season.

And an 8 per cent price reduction means less and less as you move up the price levels.

Demand for these white goods is also relatively inelastic. People don’t buy more of them just because the price is lower. It’s not like you go and buy five fridges or blenders just because their prices have fallen. You will still only buy the number you need.

So, to say that demand will be boosted due to these tax cuts is to misattribute the festive season demand boost to a cut in the taxes.

Good news

Rate-cut effects aside, whatever the GST Council has done to ease the returns-filing process is welcome. Notably, it has said that all those with an annual turnover of up to ₹5 crore can file quarterly returns. This comfortably accounts for more than 90 per cent of the businesses in India, and so is a great step towards making GST easier for the small businesses. Further, with the two simplified forms — Sahaj and Sugam — the Council has also simplified the filing process for the larger players.

Overall, while the Council has taken decisions in the right direction, the messaging is a lot more chest-thumping than it should be.

Published on July 29, 2018

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