The 40-plus days of advance notice should be a relief for corporates and enterprises, he says
Neelkanth Mishra | Last Updated at August 2, 2017 02:28 IST
(This was published in the Business Standard: link)
While it was known for a while that the GST Council was going to finalise the rates in their May 18-19 meeting in Srinagar, few expected the rates to be made public. As per earlier statements made by key officials, these were to be disclosed two weeks before the launch. The 40-plus days of advance notice should be a relief for corporates and enterprises, as not only does it allow them to assess the impact on their profitability and operations, it also allows for some to-and-fro and clarifications before the clock starts. The release of rates therefore was a welcome move.
Many headlines talk of the number of items in each rate slab, and that “only” 19% of the items are in the high 28% slab. What is important is the weight of the items in the consumption basket, and how the new rates compare to existing rates. In the CPI, 52% by weight is currently either exempt or zero-rated, and only 5% is higher than 28%. 10% is taxed between 0 and 5%, 22% in the 5-12% band, 7% in the 12-18% band and 4% is taxed between 18-28%.
Similarly, service tax rates were at a “standard” 15% only in principle – there were a range of abatements applied for various sectors, for example, 75% for real-estate construction and 60% for restaurant bills. The attempt to map categories the slab closest to their current tax incidence is clear. But for many categories of relevance to the markets, like auto companies and paints, rates are higher than they were – quite meaningfully for mid-sized cars, though less so for small cars and paints.
The key questions are: how does it affect state and central tax revenues, how it affects CPI inflation and how it affects company profitability in various sectors. These require non-trivial analysis, and I expect we will collectively understand things better over the next several weeks.
To assess impact on tax revenues, what matters is the quantum of taxes collected in each sector, and the state-wise distribution for each. For example, autos are a small part of CPI, but are a large part of excise duty and sales tax collection: they were nearly 7% of the taxes that were subsumed under GST, and these are mostly higher in the upcoming regime. The same can be said for services.
We are still working through the numbers, but it would seem that the government’s tax take would be higher than it is now, assuming the economic momentum stays unaffected. Two major reasons for this belief: firstly, the tax rates mostly have been mapped to the higher slab: that is, if a sector was taxed at 4%, it now gets taxed at 5%, and not zero. Secondly, the distribution chain was earlier only paying VAT on its margins (3% for autos but 15-20% for many consumer goods), but now has to pay full GST. If so, it would be positive for fiscal deficits, lower bond yields and interest rates.
The impact on consumer price inflation (CPI) is equally hard to assess, particularly as value added tax (VAT) rates varied across states. Further, one needs to factor in the taxes on inputs and the pricing power for each category and their suppliers.
The analysis for companies needs to be equally nuanced. One needs to factor in not just the change in the headline tax, but also changes to tax rates for the companies’ customers and suppliers, and the bargaining power the firm has with each.
Further, growth in the value of consumption for each category is capped by the nominal gross domestic product (GDP) growth, unless there is disruptive innovation (like in cellphones or sachets), or rapid growth in enablers (e.g. electrification helping appliance sales). If taxes go up, there is less of the upside available for the industry, and the converse is true as well – four-wheeler sales growth in the last fifteen years has been helped by the sharp drop in excise duties over the period. Then there is the issue of formalisation – higher tax rates are a deterrent to formalisation, and low rates encourage it.