As India inched closer towards implementing a country-wide goods and services tax (GST), the spotlight has moved towards its impact on prices.
Experts expect most services to become costlier in the short-term.
The GST rate will be a key determinant on which way prices move after the introduction of new system that will alter tax administration by replacing layers of local levies with a single tax and stitch together a common national market.
An 18% GST rate can potentially push up phone and electricity bills immediately after GST’s rollout as these services are currently taxed at 15%.
“The financial impact of GST on the common man largely depends on the final GST rate. The services ubiquitously used by the common man are likely to prove expensive under the GST regime owing to escalation of GST on supply of services from the current effective rate of fifteen percent to the expected 18%,” Mahesh Jaisingh, Partner, BMR & Associates LLP, told HT.
“It is hoped that current exempt essential services like healthcare, education, should continue to be exempt under GST, eg, etc. Also, services such as telecom and insurance should be at a lower band rate of GST, as expected for goods (around 12%),” Jaisingh.
The impact of GST on prices is unknown, although in some countries such as Australia the first few years after rolling out a uniform GST had led to higher inflation.
In India, the 13th finance commission estimates prices of agricultural goods will increase by 0.61 % to 1.18% while prices of manufactured items would fall by 1.22-2.53 %.
“Our economics team believes that contrary to common perception, the short-term impact of the GST is likely to be mixed as it could temporarily raise retail inflation by 0.20-0.70 percentage points in the year of implementation,” Nomura, a brokerage and research firm, said in a research report.
Assuming that most goods and services in the economy are taxed at the standard GST rate of 17-18%, as recommended by the GST committee, the GST would result in a reduction in taxes paid for goods (currently taxed at 24-26%) but an increase in taxes paid for services (currently taxed at 15%).
“Consequently, services are likely to become costlier, while goods become cheaper on implementation of the GST,” Nomura said.
“As far as products are concerned, given the seamless flow of credits and with traders specifically being able to avail credit and the expected standard GST rate of 18%, the prices of usual products should get cheaper,” Jaisingh said.
The telecom industry has asked the government to clarify its position of taxes on value added services (VAS).
“Given the broad framework of GST, it is expected that even under the proposed GST regime, the telecom service providers may face significant challenges,” a recent paper by ASSOCHAM-KPMG said.
“For the first time , both the centre and state governments will have powers to tax services... The proposed GST law should support the government’s overall initiative of ease of doing business and offer a simplified tax regime to telecom service providers,” the paper said.
Certain VAS such as ringtones are regarded as entertainment under certain states ‘entertainment tax laws’ and are therefore subject to taxation. “Since the service tax is also liable on the revenue generated from rendering such services, there is a dual levy in the form of service tax and entertainment tax.”