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The State and Central
administration concerned with protecting revenues is hotly debating on what
would be the revenue neutral rate. In the entire din on GST, it appears that the
forgotten stakeholder is you and me who would be bearing the burden of the tax.
There is no official word on how GST would benefit the consumer. It appears that
the effect of GST on prices has so far not been deliberated on by the Empowered
Committee.
Revenue neutral?
Will GST be revenue neutral to the consumer or will it be inflationary? The
immediate effect on prices depends on the combined rate of CGST (Central GST)
and SGST (State GST). Based on international experience it is expected that the
price change in either direction would be a one-time blip and there would not be
any ongoing impact on the inflation rate.
Alan A. Tait, in his study for the IMF (‘Value Added Tax: International Practice
and Problems'), has observed: “Most Governments and the public anticipate with
trepidation the effect on prices of introduction of a value added tax. However,
the evidence shows that in most countries, the introduction of VAT, or a change
in VAT rates, is not inflationary; the change might lead to a once and for all
shift in prices, but not to an acceleration of price changes.”
In the absence of definite information on what would be the combined rate of
CGST and SGST it is difficult to hazard a guess on the direction the CPI
(Consumer Price Index) would move on implementation of GST in India. Besides,
the direction of movement of CPI would not be a correct index to gauge if the
consumer has benefited. CPI is only a very broad indicator and depends on
various factors like composition of goods in the Index, the overall growth rate
of the economy, consumer confidence, money supply, and so on.
CPI movement
When State VAT was implemented in 21 States from April 2005, the CPI had come
down from 5 per cent in April 2005 to 3.7 per cent in May 2005 and further to
3.3 per cent in June 2005. Does it mean that the consumer has benefited? May not
be so.
The Chairman of the Empowered Committee of State Finance Ministers, Dr Asim
Dasgupta, while commending the fall in CPI in April-June 2005 observed, “But the
(empowered) committee is concerned in cases where prices have risen even after
reduction in VAT rates compared to sales taxes. Index is an average concept.
Prices of some commodities have risen. We are particularly concerned about those
commodities, where prices have gone up despite reduction in VAT rates.”
Dr Dasgupta added that the panel had requested Finance Ministry officials and
other ministries concerned to hold meetings to monitor prices of VAT
commodities. On passing the benefits by manufacturers to the next stage, he said
it is not happening countrywide.
How much would manufacturers benefit on implementation of GST? Dr Kelkar has
estimated that even a 2 per cent reduction in the cost of manufacturing sector
will help profits increase by more than 20 per cent. He added that this will
attract more investment and that the only way to reduce prices is by passing on
the benefits of reduced cost to the consumer.
Will the manufacturers pass on the benefits of GST to the consumer? If not,
should it be ensured that the tax savings on implementation of GST is passed
onto the consumers?
Australian initiative
The Australian initiative on ensuring that the consumer is not exploited is
interesting. When Australia implemented GST in 2000, a New Tax System (Trade
Practices Amendment) Act 1999 inserted Part VB in the Trade Practices Act 1974.
The Australian Competition and Consumer Commission (ACCC) was vested with
transitional powers for the period July 1, 1999 to July 30, 2002, to monitor
prices in order to prevent the possibility of consumer exploitation and
excessive profit taking in the transition period after the introduction of GST.
The monitoring was intended to identify instances where customers have not
benefited fully from reductions in tax rates or have otherwise been exposed to
greater than necessary price rises.
Price exploitation occurs under Section 75AU of the Trade Practices Act where a
business: makes a supply between July 9, 1999 and July 2002; the price is
unreasonably high having regard to the introduction of GST (whether the supply
took place before or after those changes); and the price is unreasonably high
having regard to supplier's costs, supply and demand conditions and other
relevant matters.
The ACCC issued a document ‘Price exploitation and the new tax system', which
detailed the general principles, information and guidelines on when prices
contravene Section 75AU of the Trade Practices Act, 1974.
Price notices
The ACCC also published maximum price notices for particular goods/services. If
an entity supplied goods/services at a price greater than the published maximum
price, the entity was regarded as having engaged in price exploitation.
Penalty was prescribed for price exploitation or misleading and deceptive
conduct. The ACCC also conducted nationwide consumer awareness campaign on how
GST would affect prices.
Another school of thought would be that the Government should not seek to
dictate or regulate price and that entities should be allowed to make pricing
decisions based on market demand and supply equilibrium.
True, over a period of time demand-supply mechanics would operate and an entity
that indulges in profiteering on tax savings would be forced by competition to
moderate the pricing. This was the pitch of the Business Council on National
Issue when GST was implemented in Canada.
Should India follow the initiative of Australia, a country with population just
around that of Mumbai or let competitive dynamics discipline pricing decisions?
It is worth debating.
Source:
The HinduBusinessLine, India, dated
06/02/2010
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