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Over the last two months, the centre and over 15 states have passed laws to levy the Goods and Services Tax (GST). Under these laws, tax rates recommended by the GST Council will be notified by the government. The Council met in Srinagar last week to approve rates for various items. Following this decision, the government has indicated that it may invoke provisions under the GST laws to monitor prices of goods and services.[1] This will be done by setting up an anti-profiteering authority to ensure that reduction in tax rates under GST results in a fall in prices of goods and services. In this context, we look at the rates approved by the GST Council, and the role of the proposed authority to ensure that prices of various items do not increase under GST.
Q. What are the tax rates that have been approved by the Council?
The Council has classified various items under five different tax rates: (i) 5%, (ii) 12%, (iii) 18%, (iv) 28%, and (v) 28% with an additional GST compensation cess (see Table 1).[2],[3],[4] While tax rates for most of the goods and services have been approved by the Council, rates for some remaining items such as biscuits, textiles, footwear, and precious metals are expected to be decided in its next meeting on June 3, 2017.
Table 1: Tax rates for goods and services as approved by the GST Council
| 5% | 12% | 18% | 28% | 28% + Cess | |
|---|---|---|---|---|---|
| Goods |
|
|
|
|
|
| Services |
|
|
|
|
Source: GST Council Press Release, Central Board for Excise and Customs.
Q. Will GST apply on all goods and services?
No, certain items such as alcohol for human consumption, and petroleum products such as petrol, diesel and natural gas will be exempt under GST. In addition to these, the GST Council has also classified certain items under the 0% tax rate, implying that GST will not be levied on them. This list includes items of daily use such as wheat, rice, milk, eggs, fresh vegetables, meat and fish. Some services such as education and healthcare will also be exempt under GST.
Q. How will GST impact prices of goods and services?
GST subsumes various indirect taxes and seeks to reduce cascading of taxes (tax on tax). With greater efficiency in the supply of products, enhanced flow of tax credits, removal of border check posts, and changes in tax rates, prices of goods and services may come down.[5],[6],[7] Mr Arun Jaitley recently stated that the Council has classified several items under lower tax rates, when compared to the current system.[8]
However, since some tax rates such as VAT currently vary across states, the real impact of GST rates on prices may become clear only after its roll-out. For example, at present VAT rates on smart phones range between 5-15% across states. Under GST they will be taxed at 12%.[9] As a result while phones may become marginally cheaper in some states, their prices may go up in some others.
Q. What happens if tax rates come down but companies don’t reduce prices?
Few people such as the Union Revenue Secretary and Finance Ministers of Kerala and Jammu and Kashmir have expressed concerns that companies may not lower their prices despite a fall in tax rates, in order to increase their profits. The Revenue Secretary also stated that the government had received reports of few businesses increasing their product prices in anticipation of GST.[10]
To take care of such cases, the GST laws contain a provision which allows the centre to constitute an anti-profiteering authority. The authority will ensure that a reduction in tax rates under GST is passed on to the consumers. Specific powers and functions of the authority will be specified by the GST Council.[11],[12]
Q. Are there any existing mechanisms to regulate pricing of products?
Various laws have been enacted over the years to control the pricing of essential items, or check for unfair market practices. For example, the Essential Commodities Act, 1955 controls the price of certain necessary items such as medicines, food items and fertilisers.[13]
Parliament has also created statutory authorities like the Competition Commission of India to check against unfair trade practices such as cartelisation by businesses to inflate prices of goods. Regulators, such as the National Pharmaceutical Pricing Authority, are also responsible for regulating prices for items in their sectors.
Q. Could there be some challenges in implementing this mechanism?
To fulfil its mandate, the anti-profiteering authority could get involved in determining prices of various items. This may even require going through the balance sheets and finances of various companies. Some argue that this is against the idea of prices being determined by market forces of demand and supply.[14]
Another aspect to consider here is that the price of items is dependent on a combination of factors, in addition to applicable taxes. These include the cost of raw material, technology used by businesses, distribution channels, or competition in the market.
Imagine a case where the GST rate on a category of cars has come down from the current levels, but rising global prices of raw material such as steel have forced a manufacturer to increase prices. Given the mandate of the authority to ensure passing of lower tax rates to consumers, will it also consider the impact of rising input costs deciding the price of an item? Since factor costs keep fluctuating, in some cases the authority may find it difficult to evaluate the pricing decision of a business.
Q. Have other countries tried to introduce similar anti-profiteering frameworks?
Some countries such as Malaysia have in the past introduced laws to check if companies were making unreasonably high profits after the roll-out of GST.[15] While the law was supposed to remain in force for a limited period, the deadline has been extended a few times. In Australia, during the roll out of GST in the early 2000s, an existing authority was entrusted with the role of taking action against businesses that unreasonably increased prices.[16] The authority also put in place a strategy to raise consumer awareness about the available recourse in cases of price exploitation.
With rates for various items being approved, and the government considering a mechanism to ensure that any inflationary impact is minimised, the focus now shifts to the implementation of GST. This includes operationalisation of the GST Network, and notification of rules relating to registration under GST and payment of tax. The weeks ahead will be crucial for the authorities and various taxpayers in the country to ensure that GST is successfully rolled out from July 1, 2017.
[1] After fixing rates, GST Council to now focus on price behaviour of companies, The Hindustan Times, Ma 22, 2017, http://www.hindustantimes.com/business-news/after-fixing-rates-gst-council-to-now-focus-on-price-behaviour-of-companies/story-fRsAFsfEofPxMe2IXnXIMN.html.
[2] GST Rate Schedule for Goods, Central Board of Excise and Customs, GST Council, May 18, 2017, http://www.cbec.gov.in/resources//htdocs-cbec/gst/chapter-wise-rate-wise-gst-schedule-18.05.2017.pdf.
[3] GST Compensation Cess Rates for different supplies, GST Council, Central Board of Excise and Customs, May 18, 2017, http://www.cbec.gov.in/resources//htdocs-cbec/gst/gst-compensation-cess-rates-18.05.2017.pdf.
[4] Schedule of GST Rates for Services as approved by GST Council, GST Council, Central Board of Excise and Customs, May 19, 2017, http://www.cbec.gov.in/resources//htdocs-cbec/gst/Schedule%20of%20GST%20rates%20for%20services.pdf.
[5] GST rate impact: Here’s how the new tax can carry a greater punch, The Financial Express, May 24, 2017, http://www.financialexpress.com/economy/gst-rate-impact-heres-how-the-new-tax-can-carry-a-greater-punch/682762/.
[6] “So far, the GST Council has got it right”, The Hindu Business Line, May 22, 2017, http://www.thehindubusinessline.com/opinion/the-gst-council-has-got-it-right/article9709906.ece.
[7] “GST to cut inflation by 2%, create buoyancy in economy: Hasmukh Adhia”, The Times of India, May 21, 2017, http://timesofindia.indiatimes.com/business/india-business/gst-to-cut-inflation-by-2-create-buoyancy-in-economy-hasmukh-adhia/articleshow/58772448.cms.
[8] GST rate: New tax to reduce prices of most goods, from milk, coal to FMCG goods, The Financial Express, May 19, 2017, http://www.financialexpress.com/economy/gst-rate-new-tax-to-reduce-prices-of-most-goods-from-milk-coal-to-fmcg-goods/675722/.
[9] “Goods and Services Tax (GST) will lead to lower tax burden in several commodities including packaged cement, Medicaments, Smart phones, and medical devices, including surgical instruments”, Press Information Bureau, Ministry of Finance, May 23, 2017.
[10] “GST Townhall: Main concern is consumer education, says Adhia”, Live Mint, May 24, 2017.
[11] The Central Goods and Services Tax Act, 2017, http://www.prsindia.org/uploads/media/GST,%202017/Central%20GST%20Act,%202017.pdf.
[12] Rajasthan Goods and Services Tax Bill, 2017; Madhya Pradesh Goods and Services Tax Bill, 2017; Uttar Pradesh Goods and Services Tax Bill, 2017; Maharashtra Goods and Services Tax Bill, 2017.
[13] The Essential Commodities Act, 1955.
[14] “GST rollout: Anti-profiteering law could be the new face of tax terror”, The Financial Express, May 23, 2017, http://www.financialexpress.com/opinion/gst-rollout-anti-profiteering-law-could-be-the-new-face-of-tax-terror/680850/.
[15] Price Control Anti-Profiteering Act 2011, Malaysia.
[16] ACCC oversight of pricing responses to the introduction of the new tax system, Australia Competition and Consumer Commission, January 2003, https://www.accc.gov.au/system/files/GST%20final%20report.pdf.
In the last decade, the government has implemented several schemes to address issues related to urbanisation and aid the process of urban development. One of the schemes is the Smart Cities Mission, which intends to take advantage of the developments in information technology in developing the urban development strategy, across 100 cities. Last week the government announced the list of 9 new Smart Cities, taking the total to 99. In light of this, we look at the Smart Cities Mission and a few issues with it.
What is a Smart City?
The primary objective of the Mission is to develop cities that provide core infrastructure and give a decent quality of life to its citizens, a clean and sustainable environment, and apply ‘smart’ solutions.
However, the Mission document does not provide one definition of a Smart City. Instead it allows cities to come up with their own solutions of what they identify as a Smart City. The guidelines suggest that the core infrastructure elements in a Smart City will include: (i) adequate water supply, (ii) assured electricity supply, (iii) sanitation, including solid waste management, (iv) efficient urban mobility and public transport, (v) affordable housing, (vi) robust IT connectivity, and (vii) good governance. ‘Smart’ solutions may include (i) energy efficient buildings, (ii) electronic service delivery, (iii) intelligent traffic management, (iv) smart metering, (v) citizen engagement, etc.
How were the Smart Cities selected?
The Mission was introduced in the form of a competition, called the Smart City challenge. The first stage was in July 2015 when states nominated their cities for the competition. In August 2015, the Ministry of Urban Development selected 100 of those cities to participate in the competition. These cities were required to develop their smart city plans (SCPs) and compete against each other. The SCPs were evaluated on the basis of the solutions, the processes followed, the feasibility and cost effectiveness of the plans, and citizen engagement. Over the last 2 years, the Ministry has announced winner cities in batches. So far, 99 cities have been selected under the Mission.
What information do these SCPs contain?
The cities had to prepare their SCPs with two primary strategic components: (i) area-based development, and (ii) pan-city development. The area-based development would cover a particular area of the city, and could have either a redevelopment model, or be a completely new development. Pan-city development would envisage application of certain smart solutions across the city to the existing infrastructure.
Each city had to formulate its own concept, vision, mission and plan for a Smart City that was appropriate to its local context and resources. The Ministry of Urban Development provided technical assistance, through consultancy firms, to cities for helping them prepare these strategic documents.
How will the Mission be implemented?
The Mission will be implemented at the city level by a Special Purpose Vehicle (SPV). The SPV will plan, approve, release funds, implement, manage, monitor, and evaluate the Smart City development projects.
The SPV will be a limited company incorporated under the Companies Act, 2013 at the city-level. It will be chaired by the Collector/ Municipal Commissioner of the Urban Development Authority. The respective state and the Urban Local Body (ULB or municipality) will be the promoters in this company having 50:50 equity shareholding.
How are the Plans getting financed?
The Mission will be operated as a Centrally Sponsored Scheme. The central government will provide financial support of up to Rs 48,000 crore over five years, that is, an average of Rs 500 crore per city. The states and ULBs will have to contribute an equal amount. The central government allocated Rs 4,000 crore towards the Mission in the 2017-18 budget.
Since funding from the government will meet only a part of the funding required, the rest will have to be raised from other sources including: (i) states/ ULBs own resources from collection of user fees, land monetization, etc., (ii) innovative finance mechanisms such as municipal bonds, (iii) leverage borrowings from financial institutions (such as banks), and (iv) the private sector through Public Private Partnerships (PPPs).
The total cost of projects proposed under the various SCPs of the 90 winner cities is Rs 1.9 lakh crore. About 42% of this amount will come from central and state funding, 23% through private investments and PPPs, and 19% through convergence with other schemes (such as HRIDAY, AMRUT, Swachh Bharat-Urban). The remaining will be generated by the cities through the levy of local taxes, and user fees.
What are some of the issues to consider?
Financial capacity of cities: Under the Mission, cities have to generate additional revenue through various sources including market borrowings, PPPs, and land monetization. The High Powered Expert Committee on Indian Urban Infrastructure and Services (HPEC) had observed that ULBs in India are among the weakest in the world, both in terms of capacity to raise resources and financial autonomy. Even though ULBs have been getting higher allocations from the centre and states, and tax devolution to them has increased, their own tax bases are narrow. Further, owing to their poor governance and financial situation, ULBs find it difficult to access external financing.
Such a situation may pose problems when implementing the Mission, where the ULBs have to raise a significant share of the revenue through external sources (PPPs, market borrowings). For example, the Bhubaneswar Smart City Plan has a total project cost of Rs 4,537 crore (over five years), while the city’s annual budget for 2014-15 was Rs 469 crore.
In order to improve the finances of the ULBs, committees have made various recommendations, which include:
The government has recently introduced a few policies and mechanisms to address municipal financing. Examples include value capture financing through public investments in infrastructure projects, and a credit rating system for cities. In June 2017, the Pune Municipal Corporation raised Rs 200 crore by issuing municipal bonds.
Technical capacity of the ULBs: The Smart Cities Mission seeks to empower ULBs to raise their own revenue, and also lays emphasis on the capacity building of ULBs. The HPEC had observed that municipal administration has suffered due to: (i) presence of untrained and unskilled manpower, and (ii) shortage of qualified technical staff and managerial supervisors. It had recommended improving the technical capacity of ULBs by providing technical assistance to state governments, and ULBs in planning, financing, monitoring, and operation of urban programmes. The central government had allocated Rs 10.5 crore towards the capacity building component of the Mission in 2017-18.
The Ministry of Urban Development has been running several programmes to improve capacity of ULBs. This includes MoUs with 18 states to conduct training programmes for their ULB staff.
Coverage of the Mission: The Mission covers 100 cities, of which 99 have been announced as winners so far. The urban population that will be impacted through the Mission is around 96 million (data for 90 cities excluding the recently announced 9 cities).
As per Census 2011, India’s urban population was 377 million. The Mission impacts about 25% of this population. Further, most of the SCPs approved so far focus on area-based development, thus affecting a particular area of the cities. About 80% of the total project cost proposed is towards this model of development. In each city, this area-based development will cover up to 50 acres of area. The remaining 20% of the project cost is towards pan-city development proposals, which provide smart planning solutions for the entire city. It may be argued that even within the selected cities, the Mission will only impact few selected areas, and not necessarily help with development of the entire city.
