India Economy

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ABHISHEK RASTOGI | Updated on January 15, 2018 Published on March 26, 2017

GST must maintain balance between consumer benefit and ease of doing business

July 1 appears a pragmatic date for GST implementation, thanks to the efforts of the GST Council.

Earlier this month, the Council gave formal approval to the draft Bills on GST with regard to the Centre, States and union territories (IGST, CGST, SGST and UTGST). The Bills were subsequently approved by the Union Cabinet on March 20.

What facilitated these developments were the detailed discussions initiated by the Council over the last few months, which have made GST an integral part of our trade and commerce lexicon.

While finalising the draft laws, the Council discussed the issues raised by various sectors such as IT, telecom, banking and insurance. While seeking to address these concerns, the Council ensured that the broad framework of GST remained intact.

The issues resolved by the GST Council over a period of time included dual control on assessees, limits on territorial waters, composition schemes, fixation of limit on cesses and compensation to States. The Council finalised the rules related to various compliance procedures of registration, tax payment, invoice, refund and returns.

The four pending rules include composition, valuation, credits and transitions and it is hoped that a formal approval of the Council will be received by March 31, 2017.

This will be followed by the most crucial and much awaited exercise of finalising the tax slabs, as exempted, zero rated, 5 per cent, 12 per cent, 15 per cent and 28 per cent.

With the additional cess imposed on goods such as tobacco, pan masala, cigarettes and luxury cars, these goods would be taxable at a rate higher than 28 per cent.

Apart from the multiplicity of rates, the key question that arises is whether GST will reduce the prices of goods and services and whether inflationary pressure will be under control.

Anti-profiteering measure

The anti-profiteering clause embedded in the provisions seeks to ensure that the benefit of reduced tax rates and increased credits is passed on to the ultimate consumer, resulting in a check on profit margin at every stage of the value chain.

The anti-profiteering measure, by design, is aimed at checking inflation, which may be a direct fall-out of GST. The impact of the anti-profiteering measure is expected to be on the FMCG, automobile and petroleum companies, wherein there will be a lot of pressure to pass on benefits to end consumers.

Many large corporates have already calculated the financial impact of GST with certain assumptions and started price negotiations. While the fineprint is yet to be released by the government, it is hoped that a fair balance is maintained between granting benefit to the consumers and ensuring ease of doing business.

The learnings from Malaysia suggest that the provisions were misused by consumers and that businesses allocated significant time for responding to revenue investigations triggered by consumer complaints. As a policy, anti-profiteering laws could be restricted to oligopolistic or monopolistic businesses such as cement, steel, aluminium, aerated drinks and airlines where cartelisation is a common feature. For other sectors, the economics of demand and supply will take care of balancing the price in a competitive market.

Tightrope on pricing policy

The tax incidence on different goods and services will not only differ in the GST regime but also be different from the tax structure in the pre-GST regime. However, businesses expect more certainty in the days to come and do not want to go back to an era where disputes regarding classification and valuation were at the peak. As stock transfers will be taxable, business will have to plan the supply chain and walk a tightrope in terms of pricing policy. The credit pool will significantly increase and hence setting up a robust credit monitoring mechanism will prove useful to mitigate the burden of tax incidence.

The need of the hour is certainly to delve deeper into the contractual terms so that tax clauses, indemnity clauses and jurisdiction for litigation, including advance ruling, are appropriately incorporated.

While the new tax structure brings a promise of greater transparency and certainty with minimum leakages, better planning at the inception will help businesses strengthen their priorities, vision and objectives.

The writer is Partner, Khaitan & Co

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