GST reforms: Festival cheer for consumers but many suppliers face IDR

The political leaders and the bureaucrats at the Central and State governments deserve all praise for ushering in drastic cuts in the rates of Goods and Services Tax (GST) mainly on several items of mass consumption and some process changes. However, they have also raised the expectations of significant price cuts that may happen in the short run but may be unsustainable in the long run in some sectors.  

In his Independence Day speech, our Prime Minister announced a Diwali gift by way of significant reductions in the GST rates and simplification of processes. Within days, the finance ministry (FM) convened a meeting of the Group of Ministers (GoM) to deliberate and finalise the details.  Earlier this month, the GST Council unanimously recommended the changes as proposed by the GoM. The same evening, the FM released a comprehensive press note and 73 answers to frequently asked questions (FAQs). Last week, the notifications were issued giving effect to the GST Council recommendations along with a second set of FAQs. In the meantime, useful circulars regarding post-sale discounts, relabeling prices on retail packs etc. were also issued.  Finance Minister Nirmala Sitharaman and her team have done a commendable job in implementing the GST changes before the beginning of the Navratri festival, i.e. four weeks before Diwali and within five weeks of the Prime Minister’s announcement.

The ruling dispensation has, however, raised expectations of significantly lower prices for the consumers that the businesses facing ‘inverted duty rates’ (IDR) structure cannot deliver. Refunds due to IDR do not include unutilized input tax credits (ITC) of GST paid on input services and capital goods. Refunds due to zero rated supplies without GST payment do not include unutilized ITC of GST paid on capital goods. So, the producers paying higher GST on their inputs are staring at a huge accumulation of unutilized ITC. A controversial clarification from the  government that has rattled dealers says that refunds due to IDR will not be available where input and output are the same. The prospect of losing accumulated ITC of compensation  cess also worries many  dealers of automobiles. 

 

The government has put enormous pressure on trade to pass on the GST rate cut benefits to the consumers, despite knowing that due to IDR the final prices will come down but not to the same extent as the rate cuts and may even go up in some rare cases. Businesses might bring down the prices as a part of their usual festival discounts to avoid any adverse reactions but will find such price cuts unsustainable within a few months. In the short run, they may prefer to help the government manage the perceptions of considerable benefits to the consumers.  

Meanwhile, the importers have delayed filing bills of entry in the last few days to take advantage of lower Integrated GST (IGST) on imports of some items from today. Exporters of items now attracting lower tax rates have frontloaded their zero-rated supplies on payment of IGST under refund claim. From today, they will mostly export without IGST payment. 

Overall, the government and the consumers will have a great festival season even as all the players in the supply chain of many items that now attract lower GST grin and bear the  pain of IDR. Let us wait and see what happens. Later, they may raise the prices.

 

Email: tncrajagopalan@gmail.com