The most recent GST council meeting on 18th and 19th May has clarified the rates for almost all goods and services. The only six items left are - gold, textile, agricultural implements, bidis, footwear, and bio-diesel.
It was no surprise that for most goods, the tax slab announced was very close to the sum of taxes applicable currently. However, for some goods, the increase/decrease in tax is clearly visible. For example, ghee, which was taxed at 5% earlier shall now be taxed at 12%. For services, there's certainly an increase in tax rate from 15% to 18%.
But does it really mean that if the GST rate increases, the price will also increase? No. We saw a lot of news reports that small cars will get costly or mobile bills will increase because the tax rate has increased. Some people even jumped the gun and assumed that the FMCG sector would benefit from GST. This is very unlikely in my opinion.
At this point, we need to understand that the final price does not only depend on the tax rate. It is just one of the factor that adds to the cost. We use various goods or services for manufacturing goods or rendering any service. It may happen that the goods used as raw materials have become cheaper due to lower tax rates on those items. Also, you would now be able to set-off tax paid on services to pay tax on the sale of goods and vice-versa. Basically, there's a seamless flow of input tax credit. Companies may actually end up saving money because of this and they have to compulsorily pass this benefit to end-consumer because of the anti-profiteering law.
For example, a mobile manufacturer who may now need to charge more tax under GST compared to VAT will also get input tax credit for their advertising spends. In the current system, they do not get the credit for 15% service tax on their marketing spends, thus saving money. Similarly, a telecom player who charges you Service Tax currently doesn’t get input tax credit for VAT they pay on their hardware.
Note: Set off for tax paid on capital expenditure may be handled a little differently but there sure is benefit.
GST rate itself is not an indication of a service or product getting more expensive. It certainly isn't true that if the rate on Ghee has increased from 5% to 12%, the final price will increase by 7%. It may increase, but marginally. We need to analyze all the factors that are in play before concluding the impact of these GST rates.