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Info on pass-through of GST gains, a democratic right of consumers
September, 20th 2016

The structure of Goods and Service Tax (GST) may be an expert’s domain, but information on pass-through of benefits is a democratic right of tax-paying consumers.

It will also help determine if increased profits ‘not passed through’ have led, as they should, to a commensurate increase in direct taxes paid by manufacturers, say two indirect tax experts.

GST and prices

It is well chronicled that while a tax increase is passed on promptly, a tax cut is not always, point out R Mohan, a fiscal policy analyst and a top revenue official, and N Ramalingam, Associate Professor at the Gulati Institute of Finance and Taxation based here.

So, will introduction of GST automatically result in lower prices for consumers?

This can happen only if manufacturers pass through benefits accruing from not anymore having to deal with cascading taxes on input. If it doesn’t, the lower costs would only go to pad up their own profits.

“Even as we obsess ourselves over an acceptable GST rate, which is undoubtedly an important exercise, we seem to have assumed a priori that manufacturers would pass through the benefits.”

Experience of transitioning from Sales Tax to Value-Added Tax in 2005 has shown that that at least in certain segments, reduction in cost from non-cascading of taxes was not passed on.

“The GST has now reached a state where the customers’ case needs to be subjected to sharper focus,” Mohan and Ramalingam say.

Some people have cited country-wise examples to argue that GST is inflationary in the medium term. Others have opined that the quantum of pass-through will not be commensurate with the decrease in tax.

Control on prices

“We in India do not have dearth of published data on corporate profits. These data needs to be closely monitored if benefits accruing from non-cascading of taxes are being passed through.”

Monitoring and publishing of profit analysis is essential since it throws light on if the end consumer stands to benefit or not. Any failure must come out in the public domain.

In a market economy, administrative control on prices may not be an ideal policy prescription. But guidelines with ‘suasive pull’ could be issued to manufacturers even while not being coercive.

Policymakers and academicians should ideally take up this issue on a campaign mode and deliberate on, the experts said.

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