Dear Hasmukh Adhia, don’t threaten manufacturers. Make GST simple.
The goods and services tax (GST) was supposed to bring the price of commodities down. It was also supposed to make doing business in India easy. Tax compliance, too, in the words of the government, was supposed to go up.
Unfortunately, even after four and a half months of enacting the so-called One Tax One Nation regime in the country, the consumer is nowhere close to achieving any of the said things.
Now, finance secretary Hasmukh Adhia is threatening manufacturers with dire consequences if the tax rate cuts are not passed on to the government.
Free-markets and price control have never gone hand-in-hand. It can be done for a few essential commodities in times of emergency, but to micro-manage the price of every commodity by issuing threats of using the anti-profiteering clause in the GST – is only going to backfire and wreck havoc on an already battered Indian economy.
The trigger to issue threats to the industry comes after restaurants refused to reduce the price of food despite reduction in GST rate from 18% to 5%. The government's argument is that any tax rate reduction must immediately reflect on the final price of a product.
What Adhia and his government have overlooked is that the price of any product by manufacturers/retailers is decided on the basis of the paying capacity of consumers. This is why many times, despite rise in the cost of raw materials, many industries avoid increasing prices of their end products. This is evident in the case of car manufacturers, who, in times of low demand absorb the price of higher steel prices to keep their products competitive.
An example from the food and dining industry comes from the famous McDonald's fast food chain that kept the price of its entry McAloo Tikki burger controlled despite high inflation in the country that saw even roadside tea sellers increasing the cost of his tea by almost 100%.
Moreover, what the government has failed to understand is that the problems with the GST are not about higher or lower tax rates. It rather emanates from its complex structure and the everyday changes in the tax rates announced by the government.
Ever since the GST has come into force, the retailers have not been able to understand what rate they should charge their customers on which product to avoid any kind of loss. Since GST is based on the input tax credit mechanism, a wrong entry in the GST bill issued by the retailer can cause him a loss on the product.
Earlier this year, Finance Minister Arun Jaitley called India a 'tax non-compliant nation'. He accused Indians of not complying with the law of the land. What he did not mention, or accept, was the complexity that Indian tax regime has always been fraught with. And Jaitley would never accept that the 'ambitious' GST introduced by his government has made the tax structure almost like rocket science. Even the chartered accountants in the country are struggling to advice their clients.
Lakhs of small traders have been complaining of incurring penalty due to their failure in filing tax returns on time. However, the government got away with the crime of introducing a faulty, weak and unstable tax-filing infrastructure in the form of the goods and services tax network (GSTN) that crashed within a month of the introduction of GST.
The real purpose of GST was to bring transparency and efficiency in the economy that would have resulted in lower cost of conducting business in India.
This reduction in the cost of doing business would have allowed manufacturers reduce prices on their products to increase sales. However, the implementation of the GST has done exactly its opposite to India's manufacturing as well as the services industry.
By issuing threats of price control, the government will only instigate the taxman to harass traders and manufacturers further giving them power to extort money. This will help a few babus and tax officers – but not the consumers.