The government is considering a price-monitoring mechanism under the proposed goods and services tax (GST) to ensure that the multiple benefits of the landmark reform are passed on and head off any unwarranted price shocks. States are also keen to ensure that the effects of GST provide a demand push to the economy.
“A mechanism will be put in place to keep a tab on prices,” said a senior official aware of deliberations before the GST Council meets later this week to decide on key issues, including the tax rate.
The government is keen to put GST in place on April 1, 2017. The incidence of tax on goods is expected to fall sharply under GST, widely seen as India’s biggest reform since independence.
It will replace multiple central and state taxes, creating a national market. GDP growth is expected to get a boost of up to 2 percentage points from the reform with the bulk of benefits going to industry that will see logistics costs and taxes decline.
The government wants to guard against profiteering by companies that will benefit from seamless input credit or tax on tax. This was among the points raised by some members of the empowered committee of state finance ministers at its last meeting.
Tax experts said a price-monitoring system without legislative backing may not be effective but suggested additional compliances that could be imposed.
“The government clearly wants to ensure that GST does not lead to price increase and inflation. However, I am not sure if any price monitoring system would be effective, particularly if it does not have legislative backing,” said Siddharth Mehta, partner, PwC India.
He said this could lead to complicated compliance paperwork and avoidable disputes between government and industry and the former should instead ensure that the GST rate is moderate and credit system smooth.
LOW TAX RATE
The implementation of GST in some countries fuelled inflation and the government is keen to prevent a similar situation by starting with a low tax rate.
ET view: Broaden the Tax Base
A price monitoring mechanism is fine. But the government should desist frequent tinkering of rates to grant sector specific sops. Some experts favour setting GST rates low to start with. The other option is to have multiple rates. This makes eminent sense and will work in India just as in the EU where VAT rates vary across member states. Including large chunks of the economy in the tax base and keeping sops to the minimum will help lower GST. A wider base gives leeway to lower GST that allows credit for input taxes paid across the value chain, makes production efficient and lowers retail prices.