New Delhi: With the recently announced mega relief package worth 10 per cent of the GDP as a part of Aatmanirbhar Bharat Abhiyan, there has been an oft-repeated demand for the GST wavier, this time for a period of six months.
The argument given is that GST exemption would lead to revival of demand due to reduction in prices and hence would benefit in the fight against COVID-19.
However, these kinds of demands are pointlessly raised without fully understanding the repercussions of GST wavier on the industry and businesses, on the consumers and, of course, on the states’ finances.
No doubt, the COVID-19 pandemic has distressed the socio-political and the financial structures of the world by playing havoc with the global economy. The fallout has been unprecedented and virtually every country’s economy is on the verge of fall down.
The slump is anticipated to be as serious as the great recession, if not more. The impact on India, too, has been equally severe.
On its part, Indian Government has been making all-out effort for revival of the economy through mega economic relief and stimulus measures.
While focussing on land, labour, liquidity and laws, the recent package has extensive measures for key sectors and segments of economy including infrastructure, system, vibrant demography and revival of demand. States are also taking all possible measures.
While these measures have been well appreciated, the industry has been seeking GST waivers for certain period.
However, a simple analysis would suggest that while GST waiver will have serious adverse implications to the State finances, the industry/business would also suffer. Nevertheless, the consumers will also be hit by the price rise.
Government sources said on the condition of anonymity that the GST exemption would seriously jeopardise the interest of the industry and would not result in any significant gains to the consumers.
In the past also, when the GST exemption on sanitary napkins was allowed, it had led to similar hardship for domestic manufacturer of sanitary napkins. Later, domestic industry complained of adversity. So was the case with GST exemption on PPEs, mask, etc.
Sources in the know of the matter explained that the GST exemption would lead to blocked input tax credit (ITC) resulting in increase on the cost of manufacturing and a higher price for the consumers.
Let us see the factual position first. As far as the tax to GDP ratio is concerned, India is amongst the low tax economies of the world. GST yields about one-third of combined total tax receipts of the centre and the states.
More than 70 per cent of the total GST revenue accrues to the states through their own share and the devolution. Thus, it constitutes a lion pie in the states’ revenues.
Therefore, it is impossible for states to manage their finances without GST revenues. The low tax to GDP ratio translates only into meagre resources at the hands of the governments.
Since GST, by design, is value add tax which is collected on the value addition that occurs at every stage of supply chain. The tax collected at a previous stage, on inputs (generally referred to as input tax credit), is allowed to be set off against the output GST liability.
Eventually, the GST incidence is passed on to the consumer at the retail stage. Waiver of GST would mean breakage of this input tax chain.
While GST exemption would make output GST as zero, the ITC (GST suffered on inputs) would get blocked (not usable) and would get added to the cost. This will not only be injurious to the industry but also to the consumer at large and this is certainly not going to revive the demand.
Therefore, sources said that while consumer does not gain from GST exemption, the compliance burden would increase for the manufacturer who would be required to maintain separate account of inputs, input services and capital goods used for the items it manufactures.
In case the manufacturer is not in a position to maintain separate account, he shall be required to reverse the input tax credit on all inputs and input services used in manufacture of exempted item after applying detailed calculations.
This would lead to blockage of ITC for domestic manufacturer while the import would not suffer any such blocked ITC. Thus, everything else remaining the same, imports get an advantage over the domestic supplies.
Taking a simple case, say, of car, the waiver of GST at the hand of a dealer would mean that dealer would not collect any GST from customer while absorbing the GST paid by the car manufacturer.
The dealer will have no choice but to raise the price to pass on the GST charged by manufacturer. Thus, the consumer does not gain much rather pays a higher price.
Similarly, if GST is, also, waived at the end of the car manufacturer, the ITC accumulated by the manufacturer on his several inputs, input services and capital goods would be of no use. The manufacturer has no choice but to include it in the cost of the car.
Also, the COVID-19 pandemic has warranted that all manufacturers, dealers, wholesalers, retailers are sitting on piled up inventories with input tax credit worth several lakh crores. The waiver of GST would, thus, result instantaneously in increase of the basic price – not giving any gain to consumer.
This would lead to a demand of refund of ITC lying in balance with the manufacturers, traders, and service providers, who are already suffering from acute liquidity problems.
However, refund of several lakh crores of ITC, lying utilised with taxpayers, is impossibility. Thus, GST waiver would hurt the businesses and the state finances both, besides hitting the customer. This would be proving counter-productive for the revival of demand.
It is also equally important to keep in mind that GST waiver provides much larger incentive for imports because imports do not come with any baggage of input side taxes as compared to the domestic supply.
GST provides a level playing field to domestic industry vis-a-vis the imports. Illustratively, waiver of tax on a mobile would mean that domestically produced mobile phone has suffered the taxes on its inputs, while the imported mobile phone does not.
Hence, imported mobile would be cheaper making domestic one non-competitive. This is against the spirit of self-reliant Bharat and the interests of domestic manufacturers as well as the consumers.
Further, any decision to review the GST rates cannot be taken unilaterally by the central government. It is the recommendation of GST Council that prevails in respect of GST rates. With the situation of dire economic crises and states requiring resources more than ever to deal with the post COVID-19 pandemic situation, the council may not have comfort of this option. As it is an option that causes hardship to the businesses and the state finances, while providing virtually no relief to customer in the first place.