Journey of GST

For each act of reform or rate rationalisation, consumer satisfaction is essential. Otherwise government programmes tend to miss the aim
Representational Picture
Representational PictureFile/ GK

Believe it or not! Common people are meticulously tracking the decisions of the Good and Services Tax Council meetings to know the revision in tax rates, if any, as they always expect a cut in the percentage of taxes and more items included in the list of exemptions. The burden of mounting taxes has almost derailed the household budgets as much of their income is slipping out of their hands through taxes.

Over a period of time Goods & Services Tax, known as GST in common parlance, has become a popular subject of discussion. GST Council meetings have assumed significance on the lines of the Reserve Bank of India’s (RBI’s) monetary policy reviews. After the popularity of the repo rate, it’s the GST rates that has become a subject of discussion for the common man. If the repo rate decides the cost of bank loans, the GST rate shapes the final cost of the goods and services available in the market.

Basically, the reason for deliberating upon the GST in today’s column is an email from a reader who wanted to know the expectations from the GST Council meeting scheduled to be held in July. Usually, readers have been sending their queries about various banking practices, but this maiden query about GST is interesting and merits some deliberation.

As far as the GST council is concerned, it’s gaining popularity as a common man’s institution and people have started keeping it under their lens. The reason is simple. The decision to hike the GST rates makes common consumers to shell out more from their wallets for less. For them, such a situation leads to further price rise of goods and services.

Here a word about the Council merits mention. But, before that let’s have a look at the historical journey of GST in India. It is an interesting piece of information. Even as the GST became “One Nation, One Tax’ regime in India on July 1, 2017, its journey started in 2000 during the prime ministership of Atal Bihari Vajpayee when a committee was set up to draft the GST law. It was Vajpayee who first advocated the idea of “One Nation, One Tax” to bring reform in the taxation structure of the country. In 2004, a task force concluded that the new tax structure should be put in place to enhance the tax regime at the time.

Over a period of time, the GST laws were amended a number of times and after failed attempts in the years 2011, 2013, 2015, it was successfully passed by the parliament in the year of 2016 in the historic 101st amendment of the Indian Constitution.

Before the implementation of the GST regime, the Centre and the State used to collect tax separately. Depending on the state, the tax regimes were different. Even though import tax was levied on one individual, the burden was levied on another individual and prior to the introduction of GST, direct and indirect taxes were present in India.

The erstwhile indirect tax system was characterized by multiplicity and cascading of taxes, besides technical complexities and other issues. The GST has brought financial discipline within the business organizations and at the same time it has saved the general consumers too from tax on tax situations. Hallmark of the GST is the economy-wide impacts such as better compliance, tax buoyancy, higher tax revenue collection, welfare, exports, growth, and inflation.

Now coming to the formation of the GST Council. It is a constitutional body responsible for making recommendations on issues related to the implementation of the Goods and Services Tax (GST) in India. The first of the Council was held on September 22, 2016. Since then 49 meetings at periodical intervals have been held where a host of decisions and amendments with regard to the GST regime were taken in line with the ground situation and later implemented. Precisely, the change in tax rates, exemptions, thresholds, and administrative procedures is the prerogative of the GST Council. As per the structure of the Council, ‘decisions are taken through a consensus-based approach every decision of the GST Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting with a weightage of one-third of the total votes cast to the Centre and a weightage of two-thirds of the total votes cast to the States, promoting the spirit of the co-operative federalism.’

Remarkably, since its inception, the Council in the context of rate rationalization has reduced the number of items (goods & services) under 28% GST slab from 226 to 37 items till now. The rate rationalization has become a focal point of the general consumers and any change in percentage of rates directly impacts their spending.

For the government, the GST Council is doing a wonderful job as it paves a way for smooth and consistent flow of revenue to the government with minimum possible leakage.

Notably, a Deloitte survey has revealed that the GST in its six years of existence has had a significant impact on the Indian economy with 88 per cent of Micro, Small and Medium Enterprises (MSMEs) being the biggest beneficiary of the GST regime. The MSMEs have reported a reduction in goods and services costs along with optimised supply chains. The reduction in the costs translates into drop in prices of the goods and services offered by these enterprises.

Understanding the working of GST is of utmost importance. As a consumer of any product and service, you have to be knowledgeable about its implementation. Let me share how an acquaintance, a tax expert, explains the GST working in the simplest form.

The manufacturer will have to pay GST on the raw material that is purchased and the value that has been added to make the product. The service provider is responsible for paying GST on both the product's purchase price and the value added to it.

However, the manufacturer's tax payment may be deducted from the total GST that must be paid. Retailers have to pay GST on both the product he bought from the distributor and the margin he adds.

However, the retailer's tax payment may be deducted from the total amount of GST that must be paid. Finally, It’s the consumer who has to pay GST on the product purchased.

Here it is also imperative to understand the decision of the GST Council to revise rate in upward direction or levy tax on any exempted items would drive up inflation and dampen household spending. The burden will be more on the lower-middle-income class, as most of these items form a significant part of their consumption basket.

In the past, the Council flirted with the GST rates and withdrew tax exemption for several unbranded and pre-packed food items, including farm and dairy products. It also imposed GST on fees charged by banks for issuing cheques and a tax on hotel rooms costing less than Rs.1,000 per day, which were under the exempted category.

Any attempt of the Council to boost tax revenues for the government in the name of rate rationalization can lead to higher prices, that too at a time when inflation remains a matter of concern. This way household inflation would continue to be under stress.

It has been observed that the hike in GST rates impacts the wholesale price index as they go into production. It depends on how companies transmit the hike in wholesale prices to retail prices. Usually, it is quickly transmitted and disrupts the domestic budgets.

Precisely, the effect of GST on the average persons or middle-class households needs a closer look. Changes in their cost of requirements matters in the general economy.

It is excellent for them when prices for everyday products and services fall. However, it triggers panic among the general consumers when any reform causes the inflation to rise.

The bottom line is that for each act of reform or rate rationalisation, consumer satisfaction is essential. Without it, the government programmes tend to miss the aim as intended. 

(The views are of the author & not the institution he works for)

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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