To avoid hoarding, market distortions, Centre unlikely to announce GST rates soon

Financial Express By Sumit Jha April 25, 2017 7:31 AM

While the businesses are waiting for the tax rates for various commodities under the Goods and Services Tax (GST), the government is unlikely to announce the rates soon.

The fitment of rates will be made public only a few days before the July 1 roll-out, sources told FE, adding that an early announcement could give rise to market distortions and hoarding. (Reuters)

While the businesses are waiting for the tax rates for various commodities under the Goods and Services Tax (GST), the government is unlikely to announce the rates soon. The fitment of rates will be made public only a few days before the July 1 roll-out, sources told FE, adding that an early announcement could give rise to market distortions and hoarding. “Unlike the West, India has a price-sensitive market where any indication of minor increase or decrease in tax rates tempts the consumers to rate buy a product. This rate buying is not a good indication for any economy as it may result in black marketing and hoarding,” Rajat Mohan, director-indirect taxation, Nangia & Co said.

He agreed that the government could control such malpractices if rates are unveiled closer to the date of GST implementation.

Although the GST Council’s next meeting is slated to be held in Srinagar on May 16 and 17, the council is only likely to review the progress made by officials in the rate fitment committee. The rate fitment committee which comprises tax officials of the central and state governments has only met once last week where they deliberated on fine-tuning the principle of application of rates, a source said.

“It’s a possibility that a manufacturer may ramp up or slow down production till July 1 if it’s known that a commodity will be taxed at a lower/higher rate under GST. But these are business decisions an entrepreneur needs to take, especially since transition rules allow only 40% of input tax credit on excise tax paid on the closing stocks, which may not be sufficient for many businesses,” Archit Gupta, founder and CEO, Cleartax.com said.

The source reiterated that the GST rate for an item will be, to the extent possible, the one that is nearest to the current rate. It is expected that the council will take into account is the real tax incidence at present rather than the nominal rate.

For instance, if the nominal tax rate on an item with maximum retail price of `150 and ex-factory price of `100 is 26.5% (12.5% excise and 14% VAT), the real tax incidence on the price to the consumer could be just over 22%, as the excise duty is virtually levied on the ex-factory price, with abatement for post-manufacturing value addition.

The flip side of the delayed announcement of rates is the paucity of time for businesses to prepare themselves. Gupta said while large companies have been preparing for GST for over a year and are more likely to adjust to the late rate announcement, it can wreak havoc for small businesses.

“Professionals and businesses need time to access the impact of reduced tax rates and we feel the time is short in case the announcement of tax rates is made near to the date of implementation, especially for FMCG companies which would have numerous products with different rates,” Mohan said.

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