Impact of Goods and Service Tax on Indian Consumers

by

Anita A. Patil

INTRODUCTION
In India, we have two types of taxes. First, Direct taxes which are directly paid by an individual taxed on Salary, wages, commission etc. Indirect taxes which are indirectly paid by an individual for the goods purchased by an individual such as Service Tax, Excise Duty, Value Added Tax etc. G.S.T that is goods and services tax has been introduced in India on 1st July 2017. G.S.T has been applied only on the part of Indirect taxes. As the name of the tax suggests it will be applied on the goods and services rendered to the consumers.

The stage of product moves from borrowing raw materials to manufacturing the same then, transporting it to warehouses (Incase, of excess of goods manufactured) then transporting again to the whole sellers then retailers and finally the product/service is rendered by the consumers. In this process, each stage gives a value to the product.[1] for example: when raw materials are purchased it's been converted into finished product which gives an addition value to the good/services. This, addition is called as Value addition. Taking this step into consideration a tax must be added. This tax was called as Value Added Tax (V.A.T). There were stages wherein an excise duty was also charged. To bring in uniformity between this process an idea of G.S.T was launched. According to this Act, a single Tax will be charged for the entire process that is G.S.T.


OBJECTIVES

  1. To create uniformity: This can be achieved through charging similar percent of tax throughout the process from purchasing the material to final consumption of product.
  2. Corruption- Free India: Uniformity in taxes would reduce the bribes taken by any manufacturer/wholesaler/retailer as the charge for each product all over India would be same. This would lead to two things:
    • Transparency
    • Boast in the economy
  3. Exempted goods: GST has exempted goods and services like Education, Health services and food. This brings us to the conclusion that Indian Government emphasised on the below points such as:
    • To improve the health facility in India
    • To increase the rate of educated people
    • To make sure that every person in India gets food to eat.

CONCEPT OF G.S.T
For understanding the system[2] of G.S.T, the goods were divided into two parts:

  1. Intra-State Supply: Intra-State Supply of goods means when, a producer/manufacturer supplies goods from one state to another state. This can also include outside India.
    In intra state supply the taxes will be divided into two parts
    • Central G.S.T.
    • State G.S.T.
    Central G.S.T will be collected by the Central Government, whereas for State G.S.T will be collected by the State Government.
  2. Inter-state Supply: In inter-state Supply the taxes will be constituted into only one concept that is Integrated G.S.T. This will be divided among both State and Central Government.

IMPLEMENTATION OF GST: UNDERSTANDING THE PROCESS

Since the liberalization in 1991, GST will perhaps be the biggest reform in Indian economy. GST differs greatly from the previous tax regimes and when implemented, the economy will witness some massive changes.

  • Stage 1:

    In a hypothetical situation, a manufacture, say a manufacturer of shirts, buys raw materials for production. For example, threads, buttons, cloth, equipment, etc. Suppose these costs him Rs 100, including the tax of Rs 10.[3]
    In the process of manufacturing and selling shirts, the producer invariably adds value to the raw materials that he initially began working with. Suppose the value addition is Rs 30. Therefore, the gross value of his product is now Rs 130. Applying a tax rate of 10%, the tax levied on him will be Rs 13. Although under Goods and Service tax , this tax can be set off against the tax that has already been imposed on inputs. The effective GST, therefore is Rs 3 (Rs 13 - Rs 10).[4]

  • Stage 2:

    In this stage, the goods are passed on from producer to wholesaler. When the wholesaler buys these goods from the manufacturer, he adds value to them, which is basically his margin. In this example, let's suppose it is Rs 20. The gross value, therefore, increases by 20 and becomes Rs 150.[5]
    The tax rate of 10% is levied and the amount will be Rs 15. However, he can set off this tax against the amount paid to the manufacture, which was inclusive of tax. Therefore, the effective tax that will be levied will be Rs 2 (Rs 15 - Rs 13).[6]

  • Stage 3:

    This is the final and last stage of this chain wherein; the retailer purchases the good from the wholesaler. He makes a purchase of Rs 150, and further adds a value of Rs 10. The gross value of sale, therefore goes up to Rs 160. The tax that will be levied on this at the rate of 10% will be Rs 16. However, as in the earlier stage, the retailer can set this off against the tax already paid by him at the time of purchase. Therefore, the incidence of tax on him is Re 1 (Rs 16 - Rs 15).[7]
    The aggregate GDP of a good throughout this three stage chain (from manufacturer to wholesaler to retailer) is Rs 10+ Rs 3+ Rs 2+ Re 1= Rs 16.[8]


  • A Non- GST Regime :

    In the previous taxation system in India, i.e., Non-Goods and Service Tax regime, there was a cascading effect, a "double counting" of tax, i.e., "tax-on-tax" as there was no opportunities to set off tax that has already been paid in an earlier stage in the process of production.
    Re-visiting the example discussed above from a non-GST perspective, the manufacturer would buy raw materials at Rs 100, an amount inclusive of tax, Rs 10. The good's aggregate value, therefore, becomes Rs 130, on which a tax of Rs.13 is levied because there is no set off against the tax of Rs 10 which the person has already paid. The good is then bought by the wholesaler at Rs 143.
    Wholesaler adds a value of Rs 20 and the gross value sold by him becomes Rs 163. On this, a tax of Rs 16.30 is levied and the sale value finally becomes Rs 179.30. The wholesaler cannot set off his tax like in a GST regime and has to pay the tax on the goods he purchases from the manufacturer.
    Similarly, the retailer buys goods at Rs 179.30 and sells it as Rs 208.23, which is inclusive of his value added to it, of Rs 10 and tax of Rs 118.93. thus, the net tax on the chain from raw materials to final retailer in a non-GST regime will be Rs 10 + Rs 13+ Rs 16.30 + Rs 18.93 = Rs 58.23. The end consumer will have to pay a total of Rs 208.23 (Rs 150 + Rs 58.23). This is a huge amount compared to the final price to a consumer in a GST regime, which was Rs 166. This simple example itself shows how massive the impact of GST will be, one in favour of the consumers who will be at an advantage since the prices of goods and services will be substantially lower.
    The previous taxation mechanism that India followed at both, central and state levels is VAT system (Value Added Tax). This VAT or CENVAT, however, extends only to central excise duty and service tax. The CENVAT is inefficient because its scope is limited to the stage of manufacturing alone. It doesn't even allow the manufacturers the an opportunity to set off this tax already paid by them against other central taxes such as surcharges or excise duties.[9]
    Due to these inefficiencies of the previous taxation system, several industrial bodies in India and MNC within India are looking forward to the new tax regime. FICCI, for example, said that the much-awaited GST will be one of the most significant steps taken by the government in the area of indirect taxes. The organization has said that from the consumer point of view, this would be a monumental achievement. There will be a huge reduction in the overall tax burden on consumers, which is currently 25% to 30%. The introduction of GST will also make Indian products competitive in the global market. With a drastic reduction in prices, the economy will witness a spur in growth.[10]
    This amalgamation of Central and State taxes into one will not only make mitigate the issues of double taxation but also pave way for a common national market.

  • In Mixed Scenario:

    Goods and Services Tax is a uniform taxation system which allows seamless transfer of goods and services. This is the most simplified tax which facilitates multiple benefits such as increase in Gross Domestic Product (GDP), increase in tax collections, no differences between State's taxes, strengthening of the economy and more importantly eliminates all complications in indirect taxes.
    All the previous indirect taxes such as VAT, service tax, central excise duty, will cease to exist with the introduction of GST. Previously, in case of manufactured consumer goods the consumer is charged around 25 to 26 per cent more than the cost of production due to excise duty and value added tax. Sometimes, it may even go up to 30 per cent. Experts predict that the GST rate in India may be in between 14 and 16 per cent. The benefit of reduced taxes may be passed on to the consumer by the dealer in the long-run and thus, there are chances of decrease in the prices of basic goods.[11]

RECENT ISSUES OF GST IN INDIA

The impact of consumers was based on the rate at which tax is charged. Now, lets have a look at what issues have come up after the implementation of GST.

The issues are as follows:

  1. Sanitary Napkins:

    Sanitary napkins have been raised up to 12%. Already the use of Sanitary Napkins is less because women cannot afford the cost at which it's sold. Moreover, due to GST the prices are rising and rising. One of the targeted products is Sanitary Napkins. Why are their prices being hiked? It's a product for a woman to have comfortable lifestyle during their menstrual cycles. It's not a luxury product. The main reason for same is because the raw materials required for the following product is increasing.[12] This reason was given by B. Pramod Nair, partner and director of Wager hygiene. This can affect the hygiene of a woman which can lead to many diseases.

  2. Rise in price in food industry:

    Restaurants and hotels are mainly charging the tax either by 12% or 18%. Moreover, to recover the amount this industry is raising the prices of food and beverages which has led to decrease in consumption of food and furthermore, leads to dip in sales of hotels and restaurants. This has been a major issue in place like Chennai.

  3. Tamil Nadu's Entertainment Tax:

    Tamil Nadu theatres were on strike for four days because the government wanted to charge 30% as entertainment tax with 28% GST on movie tickets.[14] Though, later this demand was withdrawn. But the point of concern in this issue is when government has decided one country one tax then how can any state government charge extra to the consumers.[13] This would make consumers to restrain themselves from watching movies.
    The Factors affecting consumers are as follows:

    • Financial and Consumption Factors
    • Social Factor
    • Psychological Factors
    • Habitat Good

COMPARATIVE STUDY BETWEEN INDIA AND OTHER COUNTRIES

There are 140 countries who have adopted Goods and Services Taxes system. France was the first country to implement G.S.T in the country. Let's have a comparative study of India and other parts of world.


France and India[15]
Points for Difference France India
Act Name It was the first country to introduce GST in 1954.
It is also Known as Value Added Tax
It is introduced recently in 2017.
It is also Known as Goods and Services Tax (India)
Objective The main objective was to reduce Sales Tax and tariffs which would not encourage Smuggling and cheating[16] To create one Tax under the umbrella of indirect Taxes.
Standard Rate The standard rate is 20% The standard rate is 28%
Exempted items Has exempted G.S.T under transactions of:
  • Government
  • Diplomatic relations
  • Exports
  • Goods and Services especially exercised by the government.
Has exempted G.S.T under
  • Health care
  • Education Services
  • Food items

Having looked at this comparative study, we can understand that France Government emphasised on at two aspects:

  • To make services convenient for their citizens.
  • To improve relations with other countries by exporting their products and by maintaining diplomatic relations.


Singapore and India[17]
Points for Difference Singapore India
Act Name It was introduced on 1st April 1994.
It is also known as Goods and Services Tax
It is introduced recently in 2017.
It is also Known as Goods and Services Tax (India)
Objective It was intended to shift taxes from income based to a consumption based to boast Singapore's International competitiveness[18] To create one Tax under the umbrella of indirect Taxes.
Standard Rate The standard rate is 7% The standard rate is 28%
Exempted items The items exempted under GST are as follows:
  • Real estate
  • Financial Services
  • Residential area.
Has exempted G.S.T under
  • Health care
  • Education Services
  • Food items

With above study, we get to know that Singapore Government has emphasised on one thing that is to improvise the Standard of living its financial services as well being a capital of Finance.


United Kingdom and India[19]
Points for Difference United Kingdom India
Act Name It was introduced in 1973.
It is also known as Value Added Tax
It is introduced recently in 2017.
It is also Known as Goods and Services Tax (India)
Objective It had introduced to join the European Economic Community.[20] To create one Tax under the umbrella of indirect Taxes.
Standard Rate The standard rate is 20% The standard rate is 28%
Exempted items The items exempted under GST are as follows:
  • Medical
  • Education
  • Finance
  • Insurance.
Has exempted G.S.T under
  • Health care
  • Education Services
  • Food items

With above study, we can understand that Britain Government emphasised on three things:

  • To encourage the rate of education
  • To improve the Medical facilities
  • To make sure every person has enough money.


Canada and India[21]
Points for Difference Canada India
Act Name It was introduced on 1st January,1991.
It is also known as Federal Goods and Service Taxes and Harmonised Sales Tax
It is introduced recently in 2017.
It is also Known as Goods and Services Tax (India)
Objective It was implemented to improve the ability of manufacturing sector and its ability to export competitively. To create one Tax under the umbrella of indirect Taxes.
Standard Rate GST- 5%
HST- 0%-15%
The standard rate is 28%
Exempted items The items exempted under GST are as follows:
  • Real Estate
  • Financial Services
  • Health
  • Education
  • Rent
  • Charity
Has exempted G.S.T under
  • Health care
  • Education Services
  • Food items

From the above study, we understand that Canadian Government emphasised on three things:

  • To increase the Education Rate.
  • To improve the standard of living.
  • To make sure that each person gets a shelter.


With Comparison of India with developed countries two questions arise before us?

  • Q.1. Why India follows dual system of GST?
  • Q.2. Why India has higher rate of GST?


  • Why India follows dual system of GST?

    As India is a federal country, GST has been decided to be collected by both Central and State government.[22] The main reason for applying GST to both levels of government was to satisfy the constitutional requirement that is to have principle of federalism.

  • Why India has higher rate of GST?

    The main reason to rate higher rate of GST was because government feared of loss in receiving revenue.[23] Therefore, it was changed two-three times.

Note: Only countries like Canada, Brazil and India have a dual system of GST.


RECOMMENDATIONS

One cannot clap with one hand. Therefore, this Act can only be successful when government, Manufacturers/Traders, Whole sellers/Retailers and Consumer know their duties for the following.

  • Government:
    As government has implemented the plan it's their duty to control the same. This can be achieved by:
    1. Conducting daily meetings and discuss on the on-going issues.
    2. To take stringent action if same is not followed by the traders.
    3. Always think by stepping into shoes of consumers.
    4. To take initiative of training people for GST

  • Manufacturers/Traders:
    1. The manufactures/ traders should take in account that consumer is a King and should take decisions accordingly.
    2. They must not charge more than expected price to the Whole sellers/Retailers.
    3. Must grant proper bill to whole sellers/Retailers
    4. Must follow instructions as given by the government

  • Whole sellers/Retailers:
    1. Must not accept goods at higher than the rate charged by Manufacturers/Traders
    2. Must not charge product at higher price to earn profit.
    3. Must grant proper bill to the consumer
    4. Must follow instructions as given by the government.

  • Consumers:
    1. Consumer should ask for proper bill
    2. In case of any deficiency of goods/services, Higher price charged than MRP by Manufacturers/Traders/Whole sellers/Retailers consumer must file a complaint in Consumer Dispute Redressal Forum.

CONCLUSION

The primary purpose of GST is to put an end to the multiple tax regimes on goods and services and bring them under a single umbrella tax. The taxes like octroi, excise duty, service tax, etc. Though the impact of GST cannot be exactly predicted yet, it is expected that prices of goods will reduce significantly. The cascading effect of "tax-on-tax" will diminish in the case of goods whereas the prices of services are likely to increase. These effects are expected to cancel each other out but nothing can be said with certainty yet. Though the experiences of countries suggest that the GST system is far superior to the multiple-tax regime of India. However, it is strongly recommended that lawmakers and government administrators shift their gaze towards the errors these countries made while implementing this one-tax regime.

While it will be a monumental achievement for India if this regime can reduce prices and make business easier in India, consumers, for whom this change has been initiated, shouldn't be ignored. Till now, the government has concentrated mostly on price reduction but necessary steps should be taken to ensure the rights of consumers aren't being infringed. There should be a provision in the GST bill that redefines consumer rights along the lines of GST. Since the practice of imposing several taxes has been followed for several years, people need to be made aware of this change in the fiscal policy, lest they could be duped by sellers and service providers.

Another issue that the government may face while implementation is one of revenue neutral rate. A few renowned economic analysts are of the view that if the three items, i.e., tobacco, petroleum and alcohol, are included, the neutral rate of 27% that has been decided will most probably come down to about 18%. However, this isn't a highly logical conclusion. This rate will come down if and only if the average duty on these three commodities is lesser than 27%. But these three are heavily taxed. The average rate of tax on these goods is much higher than that of other goods. Hence, if these are included in GST, there is a very low chance that the neutral rate will reduce. Some of the expert committees, previously, have recommended a mere 18% but this just an estimate and hasn't been calculated in great. In conclusion, though there are many hurdles in implementation of GST, its results are definitely worth the hardships. As long as India doesn't disregard the lessons of other countries and consumer rights, this path will surely lead this country to prosperity.


REFERENCES

[1] What is GST law in India? Goods and Services Tax law explained; available at https://cleartax.in/s/gst-law-goods-and-services-tax

[2] Guide to CGST, SGST, IGST. (May 30, 2017); available at https://www.indiafilings.com/learn/guide-to-cgst-sgst-and-igst/

[3] Goods and Services Tax (GST) Bill, Explained, THE INDIAN EXPRESS; available at http://indianexpress.com/article/explained/gst-bill-parliament-what-is-goods-services-tax-economy-explained-2950335

[4] ibid

[5] ibid

[6] ibid

[7] ibid

[8] ibid

[9] ibid

[10] Looking Forward to GST Becoming a Reality: FICCI, THE INDIAN EXPRESS; available at http://indianexpress.com/article/business/business-others/looking-forward-to-gst-becoming-a-reality-ficci-2950131

[11] R. Kavitha Rao ,Working Paper 2008-57 on "Goods and Services Tax for India", NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY, 3, (2013).

[12] Gireeesh Chandra Prasad & SapnaAgrawal, GST Rollout: Government defends tax on sanitary pads and disability aids, (July 07,2017); available at http://www.hindustantimes.com/business-news/gst-rollout-government-defends-tax-on-sanitary-pads-and-disability-aids/story-9VCx6JdFwxv1hBW0G4v9lN.html

[13] SangeetaKandavel. For eateries, GST a ruse to raise prices; available at http://www.thehindu.com/news/cities/chennai/for-eateries-tax-a-ruse-to-raise-prices/article19327719.ece

[14] Tamil Nadu theatres to open as entertainment tax row ends; available at http://www.newindianexpress.com/states/tamil-nadu/2017/jul/06/tamil-nadu-theaters-to-open-as-entertainment-tax-row-ends-1625083.html

[15] GST in India vs GST in other countries: How India differs; available at https://cleartax.in/s/gst-india-and-other-countries-comparison

[16] Goods and Services Tax (GST); available at https://timetrimebooksoftwaresolutionslawcrux.wordpress.com/2012/10/29/goods-and-service-tax-gst-in-france

[17] GST in India vs GST in other countries: How India differs; available at https://cleartax.in/s/gst-india-and-other-countries-comparison

[18] Introduction to Goods and Services Tax available; available at http://eresources.nlb.gov.sg/history/events/c5594d45-4948-4080-a6fb-5175eb8d83c3

[19] GST in India vs GST in other countries: How India differs; available at https://cleartax.in/s/gst-india-and-other-countries-comparison

[20] Harry Wallop, General Election 2010: A brief history of Value added Tax; available at http://www.telegraph.co.uk/news/election-2010/7582869/VAT-a-brief-history.html

[21] GST in India vs GST in other countries: How India differs; available at https://cleartax.in/s/gst-india-and-other-countries-comparison

[22] Difference between Indian GST and other countries GST; available at http://howtoexportimport.com/Difference-between-Indian-GST-and-GST-of-other-cou-2241.aspx

[23] Sunny Verma, Aanchal Magazine, GST Bill: The day after, government hints at rate higher than 18%; available at http://indianexpress.com/article/business/economy/arun-jaitley-gst-bill-passed-goods-and-service-tax-rate-rajya-sabha-2954564