GST is expected to bring down prices, but all depends on new tax rates : 18-05-2017
The goods and services tax (GST) is expected to reduce prices by eliminating multiple levies, but could some goods become costlier?
While the product and service-specific GST rates will be known only after a few weeks, most manufacturers have done their calculations, and some, such as washing machine and air-conditioner makers, expect higher taxes. These appliances are taxed at 2324%, which is closer to the 28% GST slab than 18%. Government sources have already hinted that goods that fall between two GST slabs may be taxed at the higher rate, so the manufacturers’ estimates may be well-founded.
Soap makers expect their tax burden to go up, even though the government is trying to spare a rate hike on articles of common use, such as glucose biscuits. The cheap varieties of biscuits may be taxed at a rate lower than 12%, the slab for biscuits. Shampoo sachets may also be taxed at a lower rate than larger packs.
“There is a lot of brainstorming to ensure that mass consumption products do not get expensive,” said a minister.
Food processing minister Harsimrat Kaur Badal said she had written to the finance minister suggesting that food articles, which are currently taxed at 4-6%, be kept in the lowest bracket “because we cannot afford food inflation at all. I have been assured that it will be in the lowest bracket (5%).”
Tax experts warn that a pick-and-choose policy also makes the structure complex.”The possibility of lower rates or certain products in each category cannot be ruled out considering the act that these may be consumed by the weaker section of society. This will, however, increase the complexities in the GST regime. It is, therefore, essential to keep such exceptions to the minimum and have lower rates for certain products in a category only when it is absolutely essential,” said MS Mani, senior director for indirect taxes at consulting firm Deloitte Haskins & Sells.
Businesses now have their eyes on the GST Council meeting in Srinagar that is expected to finalise the rates by Friday ahead of the July 1 GST implementation deadline.
Once GST kicks in, manufacturers will get more input credit as about a dozen parallel taxes of states and the Centre will be subsumed in it. For instance, car manufacturers cannot claim credit for the state VAT that they pay on components. The value of these additional taxes is passed on to the consumer. GST will do away with this `tax on tax’ and help bring down prices.
The extent to which manufacturers will gain from the consolidation of taxes under GST will depend on the complexity of their product. A steel bar manufacturer might gain less than a horn manufacturer. Similarly, pure-play service providers, such as transporters, may offer a lower discount than manpower suppliers, a consultant explained.
“Manufacturers are re-negotiating price agreements with suppliers and asking for 3-10% discount,” said a consultant who is advising some of the top 1,000 companies on the transition to GST.
Some companies also expect the movement of goods to speed up as check posts reduce, even if they do not go away completely. Having fewer check posts might also eliminate the illegal costs of `hafta’ (extortion at borders) and “map finders” (individuals who tell truck drivers what route to take to avoid paying hafta).
For now, companies are waiting for clarity on tax rates. “It depends on the classification of the goods and several other factors. We enter into annual negotiations with vendors on rates, based on an index,” said Maruti Suzuki CFO Ajay Seth. “Whatever benefit will accrue will be passed on but we are still quantifying it. There is a possibility that the cash flow requirement for dealers will go up because of the new regime. All this will need to be factored in.”
Will prices come down?
The anti-profiteering clause in the GST law has put pressure on companies to lower prices, but they are not sure how much benefit they will be able to pass on.
Prices are not the only element under negotiation.
A company will miss out on its GST refunds if any supplier, transporter or distributor in the chain defaults. So, contracts are being re-written to provide for this prospect. Some companies have inserted a penalty clause for delayed payment of taxes. Some others will not release suppliers’ payments till all tax dues are cleared.
“We will change the payment terms and deduct the amount from the bill if the tax is not paid because I do not want my company to lose out on input credit,” said Mother Dairy Fruit & Vegetable CFO Meghnad Mitra.
Others, such as PepsiCo, may be more flexible. “We will have new clauses or see if the language needs to be reworked to secure our financial interest,” said PepsiCo India CFO Rajdeep Duttagupta.
Source : Economic Times