So, what has changed with GST?
Before GST was introduced, sometime in 1990 the Packaged Commodities act required manufacturers to declare the maximum retail price inclusive of all taxes in the label. This required a weighted average tax working for each product/pack by the manufacturer by considering the sales dispersion and tax rates by state. For some products, manufacturers chose to sell at different rates in different states (or groups of states) but in most of the products, a uniform price was the norm.
This was a welcomed by both customers and by retailers alike and checked infiltration of goods from low tax states to high tax states. But it also had an insidious impact that has strangely passed scrutiny and comment by experts. This implied that consumers in the low tax state were not getting the benefit of lower tax and were indirectly paying taxes on behalf of customers in higher tax states.
Incidentally it also created opportunity for some savvy state finance ministers to keep increasing the tax rates as the burden was shared by all other states.
GST has put a stop to the ludicrous incongruity in states charging varying rates of taxes only for the manufacturer to create a weighted rate so that a uniform price can be declared.
In recognising this, we also then raise the question as to how appropriate it is to protect the tax revenue of the states in post GST scenario. Hopefully and progressively the legacy effect will wean away and consumption in each state will form the main basis for GST revenue
Let us look at some of the key issues associated with GST:
Number of tax slabs:
Experts across the spectrum have pointed out multiple tax rates as a key issue making for complexity. This expectation comes from international benchmarking where there are instances of just one or two tax rates. This argument however holds very little validity even if the policy makers have themselves been apologetic about it. An indirect tax is regressive in treating rich and poor equally for a given product.
The current configuration of 4 tax slabs excluding zero rate and cess ranging from 0 to 28% is serving the cause of keeping tax rates lower for products consumed by poor and lends some balance in take the edge off its regressive character
GST is about the state and centre pulling in one direction determining tax rate for each product, reducing tax administration effort and cost, enforcing compliance thru seamless digital trail. GST is also about eliminating taxes such as CST and Octroi that create market distortions and wastage.
With GST, we have moved 1500 plus rates (17 tax types in 37 states with 10 or more tax slabs) to just 5 rates and we want to quibble about its complexity. For the nation as one market we can well have more tax slabs than what is in operation and having less or more does not have any impact on complexity.
As GST collections improve the focus should be to reduce the rates across all slabs or the rates in the lower slabs and not reduce the number of slabs itself. The elegance of lesser number of rates is hardly the most important objective to pursue.
Impact on consumer—higher or lower taxes:
GST was conceived as a composite revenue neutral rate that subsumes different types of levies, some of which varied from state to state. The government has been keen to project GST as consumer friendly and has iteratively taken feedback and reduced rates. Improved compliance has helped achieved lower tax rates without losing too much on revenue
It is possible that the effective rates and therefore MRP has gone up for some products in some states where it was earlier depressed but by and large MRP has reduced across the board
Economic benefits of GST for marketers
GST has made entire India one market and removed the pain of avoiding incidence of double tax —- Central Sales Tax and Local Sales tax. Manufacturers with all India footprint had to necessarily operate a warehouse (or a Clearing and Forwarding agent) in each state and UT just to avoid the cost of CST. This also created a distortion of billing to all locations within a state and creating a firewall between states. This lead to wasteful and absurd situation such as billing to Hosur ( in TN) from Chennai warehouse that is 300 KMs away when Bengaluru to Hosur is just 40 kms.
GST therefore removes artificial state borders and allows manufacturers to organise logistics to optimise on cost and convenience. There is however a tendency to glamourize that GST creates opportunity for reducing or centralising warehousing. That is possibly an over-generalisation and may not be applicable for all companies and states. Even after GST the most expedient way to manage billing would be operate C&F in large states but create flexibility to bill across states by factoring contiguity and transportation cost. For large companies there may be opportunity to operate multiple C&F in large states with a view to reduce operating cost and reduce distributor inventory. This is quite independent of GST
GST has also eliminated Octroi which created need for locating warehouses outside the Octroi boundary and lead to vexatious delays and supply bottlenecks
Economic benefits from total system perspective such as lower administration cost in the long term, capture of more registered taxpayers, better compliance, digital trail for reconciliation to detect evasion etc are well understood and these benefits will swell over time
GST will also enable policy makers track performance by product category, by sector, town-class and consumer segment
Economic cost of GST
GST has some unintended negative impact such as requiring payment of the composite rate even when the goods are transferred from production unit to state-wide warehouses. This increases the working capital cost and creates a disincentive of storing finished product in the consumption point. GST has also increased the channel cost as the tax now applied on channel margin has to be absorbed by the manufacturer. These minor negative implications will have to be considered as change cost that we will have to live with in the larger interest of simpler, transparent, stable tax regime
As the GST rates are being tweaked and monitored closely manufacturers are under pressure to pass on the benefits to end customers and several cases of violation have been registered and action is taken or contemplated. There is an element of overzealousness which can be condoned as GST rates are being calibrated. But in the long term it is neither necessary nor possible for government to get into price determination and control in a market economy. Manufacturers will comply or feign compliance and pursue their independent pricing strategy based on their assessment of usage-elasticity, degree of competition and appetite for profit or market share. This phase will pass as we enter the next stage of stability in tax rates or even marginal increase in rates.
The political posturing leading to GST implementation has been comical as the roles of the ruling party and principal opposition party were reversed with the change in political power in 2014.
The ensuing political noise created acute obfuscation on the design and implementation of GST.
GST council, comprising of ministers across the political hue has displayed amazing alacrity in tackling teething issues with the platform and enforcement.
We need to reset the performance parameters of GST
Key performance parameters of GST
As the GSTN platform stabilises and the process of filing return and getting credit/refund etc become seamless the real measure of GST would be
- Introduction of incentives such as lower bank rates for working capital loan etc for GST registered dealers
- Gradual Increase in the composition levy in a calibrated manner to promote registration
- Reduction in the rates and not number of slabs, with buoyancy in collection
- Inclusion of more products from zero rate to low rate for digital capture/inclusion
- Creation of a Robust formula for GST sharing between centre and state that delinks pre-GST tax benchmark
- Coverage of all trade establishments under GST registration or Composition registration