GST overhaul: More than meets the consumer's eye

One way to evaluate the impact of rate changes for the goods and services tax (GST) is to celebrate or criticise the rate adjustment on specific items, commend oneself for delaying a purchase or hurry to buy certain items. Another way to consider the effect on the economy as a whole.

Before doing that, let us welcome the resolution of numerous inverted duty complications and the standardisation of rates on synthetic and natural fibres. This spares us from the world’s ridicule for taxing popcorn at 5%, 12%, or 18%, depending on whether it was sold loose, pre-packaged, flavoured but not sweetened, or caramelised. Now, all types of popcorn and confections are taxed uniformly at 5%. The rate on cement has been reduced from 28% to 18%.

At first glance, this looks like a simplification. But the GST Council has rendered this indirect tax even more indirect. While reducing visible consumer-facing rates, the council has quietly raised the cost of energy, but jacked up the cost of energy.

Coal will now be taxed at 18% instead of 5%. Transport of crude and refined products by pipeline will be taxed at 18% instead of 12%. Various works contracts and sub-contracts for oil exploration, development and production will be taxed at 18% instead of at 12%.

The government claims that the price of coal will not increase because the current levy of ₹400 per tonne as a compensation cess, which adds to the cost of coal, along with the 5% GST, will be subsumed into the higher 18% GST on coal. This is misleading. The compensation cess is slated to disappear once the loans taken to compensate the states for the revenue shortfall are paid off, and the finance minister said, at her press conference, that she expects this to happen in this calendar year. The effect of the increased GST on coal would be permanent.

Electricity is outside GST, with state governments levying their own duty on the final price. This is levied on the price of electricity sold by utilities. As coal-based power becomes costlier, electricity duty will climb.

The price of petroleum fuels will also go up, as the costs of production and transportation rise. Since the pricing of fuels in India is outside GST and opaque with assorted cesses levied by the Centre, and price adjustments that the oil marketing companies deploy to stagger the retail impact of a rise in global crude prices, consumers would pay more at the fuelling station without realising that GST is partly to blame.

Even e-commerce sales will become more expensive. Delivery charges, taxed at 5%, will now draw 18% GST—even when fulfilled by small operators outside GST’s ambit.

The promised simplification of registration processes for small producers who sell nationwide through e-commerce platforms is a positive step, as is the promised establishment of the appellate tribunal for GST disputes.

At the press conference where the GST changes were announced, the revenue secretary said there would be a revenue impact of some ₹48,000 crore, assuming the 2023-24 tax base. But he also said that buoyancy could take care of much of this arithmetic calculation of loss from moving many goods from a higher to a lower rate of tax. This is probably true.

When rates of indirect tax are configured, it essentially causes shifts in expenditure patterns. If you spend less on paneer and medicines, you will have more money to spend on other items. India has only a small segment of the population that would save the incremental unit of disposable income. Most people will spend what they have available, and everything they purchase will be taxed, generating GST revenue.

The additional taxes on energy would raise prices slightly across the board. The tax changes would make some items dearer, others cheaper. More of what has become more affordable would be bought, while less of what has become costlier would be purchased. All of these items would be taxed.

The savings from items that are now cheaper would likely be spent on other goods. As long as the marginal propensity to consume remains unchanged, there is no reason to expect a cumulative loss in revenue.