Real benefit of GST will be visible in 12-18 months

GST making you anxious? Here is a fact-check on how new tax will impact you.

Illustration: Dominic Xavier/Rediff.com.

The goods and services tax (GST) has caught the nation’s fancy -- which is somewhat unprecedented for a change in tax regime.

However, despite all the efforts made by the government to demystify GST, people continue to be anxious (and confused) about whether the tax will be a game changer for every household. My aim is to give a thumbnail sketch of the potential after-effects, and, hopefully, alleviate this confusion a bit.

For consumers, pricing will probably be the most important parameter to evaluate the success of this reform. On this front, GST could turn out to be a mixed bag in the short run.

Retailers may have a tough time convincing consumers about prices, especially when products become costlier. So some dope on GST on, say, pamphlets should come in handy.

There is also a psychological aspect to this transition. As consumers, we are used to seeing only value added tax (generally between 5 and 15 per cent) on our bills. What we don’t see are the other hidden taxes, such as excise duty.

Now, when retailers print 18 per cent or 28 per cent (or even 40 per cent GST in some cases) on invoices, it might adversely affect the perceived value of products in consumers’ minds.

Try to appreciate the fact that before GST, taxes could have added up to or exceeded the new rate.

As for services consumed by an average household, prices are expected to remain constant or increase only marginally. This is because while the standard GST rate on services will be 18 per cent vis-à-vis the 15 per cent service tax earlier, service providers will be able to avail additional tax benefits (credits) on the various products they source to run their businesses. These tax benefits could even outweigh the increase in tax rates in some cases (restaurants, for example).

The real benefit of GST will be visible in 12-18 months, when the new regime will have stabilised and suppliers begin to focus on realising operational efficiencies.

There are some other important areas where GST will affect or influence people’s behaviour.

Consumers would find it easier to take buying decisions as taxes become uniform across the country, Budgets become (hopefully) a non-event as far as indirect taxes are concerned and state barriers become minimal.

GST would also become a critical driver for consumers to adopt technology or digitisation. And with tax compliance requirements going online, small businesses will have no choice but to accept the fact that technology is an integral part of their businesses.

Technology will also bring in enhanced transparency. Honest taxpayers can expect a further reduction in tax incidence in the long run due to widening of tax base.

Pratik Jain is leader indirect tax and partner, PwC.