In the weekly program money talk (broadcasted on 18/07/2017), now we bring you a discussion on first review meeting of GST. The participants or Dr. P Pulla Rao, Economist and Aditi Fadnis, journalist.
Although the meeting of the goods and services tax council (GST council) which comprises state Finance Ministers, central government officials and union Finance Minister was scheduled for 5 August 2017, and emergency meeting was held via video conference earlier this week. The Finance Minister agreed to make some changes in the GST rates. This Particular case dealt with the issue of windfall profits of cigarette manufacturers. We already know everything there is to know about GST and its effect on economy. What exactly happened and why were the rates for the cigarettes changed? Or was it a new impose that was added to cigarettes?
When GST came into effect on July 1st, 2017, cigarettes attracted 28% tax (maximum GST) Plus there was another 5% cess so that state governments could be compensated for any losses. But it was found out after a few days that the tax was less than what was being levied on June 30, 2017. This resulted in huge windfall profits accruing to the cigarette manufacturing companies. Normally in such a situation the producer or manufacturer would have brought down the price of the goods as in some other cases it has been done where in GST was less than what the taxes were as on June 30, 2017. But in this case we could not do so. Perhaps as the finance minister himself said, it would not have been advisable to reduce the price of the cigarette considering the health grounds. So they kept them as static and the windfall profits were going to the company. Obviously the finance ministry which has been keeping an watch on the share market felt that the immense rise in stock prices of the cigarette companies gave them some sense that there was some kind of tax anomaly going on. Therefore the steps that you have correctly mentioned regarding an emergency meeting and it went very well. The scheduled meeting was on August 5th. But they decided to act earlier by videoconferencing. A single issue was discussed and it was about this anomaly which I would say rectified in such a way so that Ra.5000 Crore would be collected for the whole year from this particular cess which they have enhanced. So it does show what you have just said: they found something wrong , they accepted it and they corrected it and it was a very big tax issue.
So basically what will happen is that for those who are smokers the consumer prices will not change because the increased tax incidence will take away the windfall profits only. But on what basis did the Finance Ministry determine that the companies would not pass on the benefits of this lower price to the consumers?
Because they have seen in the last 15 days that the prices have not been reduced. Perhaps the companies themselves inhibited that if they reduce the price from the so called sin goods (that’s what they are called) like cigarettes , alcohol and other things, it will send a wrong message to the whole country that there are less taxes than before. So in a way, the Finance Ministry had to step in and rectify the situation so that though the consumer will not now technically pay more for the cigarettes, The finance ministry will get more taxes as it was due earlier. So it is like kind of they rectified an anomaly.
There are other issues with GST that have to be resolved. There is a differential rate for instance there is difference between the tax that the people are paying for almonds and the tax people are paying for cashew nuts. The argument is that both are nuts, so why should we pay more for one and less for the other ? Similarly there are number of issues including sanitary napkins to which the government is committed because it prevents the cervical cancer among the women and leads to the whole issue of hygiene. On that also I think the producers are complaining that the rate of tax at 12% is too high. Do you think another emergency meeting is likely to be called? Or will all these issues be taken up on 5th August?
You can’t keep calling emergency meetings, otherwise they would become routine. Now it is already the 18th of July. Therefore they will wait up to 1st week of August and they will take up all these issues which are mentioned. If I may just go a little further, hygiene goods, goods related to the health of our people especially the poor people like sanitary napkins, it would be nice if they hold an emergency meeting and remove the tax because the country wide we should do a lot for the school girls from the poorest of communities across the country. So there does not seem to be an indication of that. There are issues coming up, where it is only 15 days or 20 days since the tax (GST) has been in force. Naturally every glitch, every small irregularity or wrong perception when they levy the tax will come under the scrutiny. But it will be rectified. But one thing we must appreciate is that the machinery is working in the fact that they could call a meeting or videoconference at short notice, rectify something unanimously. So we can look forward to some nice settlement of the issues which you have raised. Yes, almonds are nuts, cashews are nuts. But there’s a small difference if you allow me to show: most of the cashew nuts are imported also. We process them and export them to Africa. Almonds also, we grow them domestically but there is huge import segment. So perhaps different economics applied, different geographies applied that we will have to consider. Though they are nuts, they are different kinds of nuts. Therefore I would go along with the Finance Ministry at this juncture and say perhaps they are doing it right. But on other issues like health goods: napkins, medicines etc., the government should come forward and be a little more liberal.
As we see the roll out of the Goods and Services Tax happening, there is unanimity that some things are moving very smoothly, but there is also acceptance that some things are facing difficulties. Things which are moving very smoothly for instance the movement of trucks from across the borders, now that the border check posts have almost been dismantled. So the trucks are moving optimally, the time they’re taking is less than they used to previously take, they’re not being stopped, there is even a proposal to give the truck driver fractures fixed some of money which the centre seems to have mandated but they were not getting it. But at the same time the old economy and the old system of extortion, rental income and people paying across the counter to get their way through check posts, I am absolutely certain that it will come back in some form. It is the transport sector which is facing some difficulty in some areas. What is your view about it?
There are two kinds of trucks as which has come out in the media reports, those which have got the license for inter-state business or inter-state permits and those which did not have the permit and which were doing the inter-state business. Now in the second category, those which did not have the permits, they are naturally off the roads at the moment because of greater scrutiny. What happens in the future would be for the government to regularise them, give them an option, give them the incentives to get national permits so that they come within the economy openly. I look forward to that. There is no point making very big valves and barriers and then keeping out 30-40% of our trucks out of the business. Now you would have noticed as you rightly said, GST is greatly helpful to the transport industry, logistics. There is no doubt about it. It is going to make thing very easy and it is going to help lower the costs of transportation. But for the rest of the things, it is only a tax. They were always paying taxes, they will continue to pay taxes. So the greatest impact of GST as we have seen in the last 18 days has been on the transport sector with most inter-state goods than those within the state generally. Once a truck goes out of the state, now that benefits more from the GST than anything else. So that is a success. There may be some resumption of this rental incomes by coercion by the officers and other things, but that depends on how well the government is aware of it and removes such regulations which are bound to create a regulatory capture thereby they will hold back these people on some excuse and that’s for the government. It is not good enough to collect the tax. It must be wary of new kinds of coercive, illegal collections which will be done by the same officials in some other manner. It is very necessary for the government to check that. Only then this will be a success.
We are also seeing a A high incidence of tax higher than before on Telecom. 15% earlier and 18% now. Which means the cast of data services, the cost of mobiles, mobile services will go up. And there will be no corresponding increase in the quality of service. Now, how are we going to i.e., how the GST Council who’s going to address this?
I think you have touch upon the most interesting aspect of our economy that is the communication. If we have cheaper Internet, cheaper data and other things our country will benefit. Far corners of the country will get Internet. Because it is very expensive now. And it is a fact that the government which had earlier 15% cumulative taxes on Telecom is now 18%. The government says under the incentives and the input tax credit, they will come down to 16%. Even then it is 1% more than what was earlier. This is not only one of the best goods in the Indian economy (communications), it is a vital good to keep everything going and moving. We have 100 crore phones in the country. We are now trying to make it Digital India whereby internet is available everywhere as it is very expensive now. Minister for communications Mr. Manoj Sinha has delved at lengths the issue which you have raised that there is an anomaly here. It has to be raised. He said that he would raise it is in the next issue and that he was working for the information. Definitely the Finance Ministry should note immediately that this much more than the tobacco sector, this is 100 times more than the cigarette sector. Therefore should act fast and bring down the GST on this in someway or other and not depend on the suppliers i.e., the telecom companies to get back their money and pass it on which never happened. Therefore the government must come down very fast to bring down the GST in some manner on communication.
The other aspect of this whole issue is, of cause that with the emphasis on Digital India and with the emphasis on cashless economy and so on, mobile phone is not just something that is luxury. It is an essential commodity in many ways. So I think it is absolutely imperative that the government should rethink this rate. But the problem is also that if you want to reduce the rate, it’s not enough to just have a GST council meetings. 75% of the council members how to agree that the rates have to be changed. So going forward, it is going to be quite difficult to tweak bands and rates unless there is perfect unanimity which there cannot ever be.
No, in the future what holds we cannot say but on the goods you have mentioned like communication sector I think there will be hundred percent unanimity because everybody realises, yeah as you have said it is and essential commodity now. We do like Internet and we want to be a cashless society but we are nowhere there. So the government should not even wait till August 5th. It would be nice if they react immediately because will be losing another 15 to 20 days time where money is collected from people for an essential good and therefore government should be very watchful and rectify on its own essential goods, health goods this kind of economic tools which are very much necessary for all strata of people. And just remember the mobile phone has been a great equaliser in our society more than any tax, more than any punitive/fiscal measure mobile phone has given a great amount of dignity and respect and everything to an ordinary man also as much as it gave to a tycoon. Therefore, as you have mentioned we really look forward for the government to move very fast on reducing taxes in the Communications Sector.
Another particularly complicated and complex piece of the architecture of the GST is the rate of GST for eating out. There is different rate for delivery of food, there is different rate for air-conditioned restaurants.
When you have too many slabs, when you have too many different ways of taxes for the same goods and you go on, one simple function of eating out into many categories, you make many more categories of the existing category, France will come in. Those who want to take advantage will take advantage and the eventual sufferer will be the poor person who is paying these bills.
Even if he is not poor, why should bills be paid by frills and fraud ?
Government should immediately come forward and read use this unnecessary categorisation like stand-up restaurants, delivery restaurants, AC restaurants. I think it’s going too far. It is complicating what should have been a simplifying measure. It is bringing back the old regime in a covert way. So lesser the categories the better it is. And eventually it should become very clear to the people that they’re paying the same rate for the same act of eating.
Well going forward it is to be hoped that the government will recognise all this wrinkles and glitches in GST and iron them out slowly.