Companies must pass on the reduction in goods and services tax to consumers, says finance secretary Hasmukh Adhia. In an interview to Deepshikha Sikarwar, he said companies will have to respond to Anti-Profiteering Authority if trade does not pass on the tax cuts. Edited excerpts:
Lately, a lot of concerns were raised about the management of the Indian economy. Do you think the Moody’s upgrade answers this criticism?
International agencies have recognised and understood the long-term strategies of this government that would benefit the economy in the long run. India, in the past three years, has been the fastest-growing economy in the world. Our macroeconomic fundamentals remain robust. Inflation has been checked. Fiscal deficit that stood at more than 6% of GDP in 2008-09 will, as per this year’s target, be 3.2% of GDP. India’s tax-to-GDP [ratio] compared to other countries is lower. The government has taken steps that will bring down tax evasion in the long run. These steps have improved tax buoyancy. Structural reforms such as the GST (goods and services tax) will not just give a boost to indirect taxes but also direct taxes. In the last three years, a lot of work has been done in this country. To an extent, this upgrade is an endorsement of government’s policies. This will make the country more attractive to foreign capital. It will make overseas borrowing cheaper for Indian companies.
There is some uncertainty around GST collections and analysts see pressure on fisc…
Everyone knows GST is a huge structural reform. Whenever there is any new measure, people take time to adapt. There were some initial issues with compliances since it is a new tax. As these issues get addressed, GST compliance will improve. In the long term, this would have its impact. Tax buoyancy, going forward, would see a huge improvement. In the next one-two years, we should reap the benefits of GST. We have revenues trends for three months. Once we have the trend for one or two months more we will be able to arrive at an estimate for the current year. So, we will have clarity by the time we formulate the budget. We will know if there is going to be a shortfall as per budget estimate for revenues. We are closely watching the GST trends.
There have been lot of changes to the GST framework since the rollout? Do you think the tax has now settled?
In the last two months, 90% of the problems based on the feedback we got have been resolved. There were two types of issues: one was related to compliance, the other to rate. Some of the items manufactured by SMEs were also placed in higher tax bracket based on earlier tax incidence. So, there was discontent. We have corrected that situation. These changes will not cause any major setback to revenues. Hopefully, we have been able to address most of the issues, so [we] won’t have to make changes for another three months. If some issue comes up, then keeping in view the revenue trends, we can take a call.
There have been demands for inclusion of real estate and petroleum into GST…
When you have GST, then all sectors of the economy should be covered. If we have to have a perfect GST, we will have to include all sectors. Outside the [GST] Council, there may be demands, but within the council, rational decisions are taken after taking all aspects into account. Rational decision, in this case, would mean that until the revenue trends do not settle down, states would not want to part with revenues from the petroleum sector. We would be happy if these are included.
There have also been demands for further rationalisation in slabs?
We should move in the direction of two slabs. But this immediately would be regressive as some items would have to be moved from 5% to higher tax rate. At present, we have household common use items at 5%. The 5 % has edible oil, sugar. If we raise these to 12%, the poor will be hit immediately. If we want to move in the direction of two slabs, we need to resist the temptation or demands for bringing any item from 12% to 5% as raising them again would be difficult.
GST rate for restaurants was cut to 5%. What kind of signal is the GST Council trying to send?
When we decided the rate for the restaurant sector, we kept it at 12 % for non-AC and 18% for AC. We assumed the industry would pass on the benefit of credit that it gets in lieu of taxes paid on input uses and reduce menu price. Some restaurant chains indeed cut their menu price, but some did not. The country has over three lakh restaurants, so it’s difficult to check if each one has passed on the benefit or not. We received maximum complaints under anti-profiteering against restaurants and real estate. Complaints against restaurants was that they straightaway levied 18% on menu price without any change in the menu price. Consumers did not find this palatable. We then looked into the issue. Some restaurants had to pay substantial commercial rent and could claim input credit for the tax paid, but some did not have large input tax credit as most items such as food item consumed by them are exempt. That’s why the council thought that input credit should not be allowed, but tax rate should be cut. This would mean that customer would have to pay lesser tax. If restaurants increase menu price, competition will take care of that. With this step, not much anti-profiteering action would be required for this sector.
There are concerns in the industry over the functioning of Anti-profiteering Authority?
Industry need not worry about the functioning of the authority. It would not go after frivolous, small complaints. If there is a complaint against a big organised sector player, then it will come into picture.
GST Council has cut tax on 178 items to 18% from 28%. But, at retail level, consumers have not felt a substantial change…
It is necessary for a retailer to pass on the tax cuts. It should be clearly understood that MRP includes all taxes. If a good has old MRP, which was on basis of 28% tax, then the rate should come down automatically. This is responsibility of the company. Company has to ensure that their entire distribution chain — wholesalers, retailers — pass on this tax cut. I would like to appeal to FMCG companies that if they want to escape action from the Anti-profiteering Authority, they should ensure that this tax cut is passed to consumers. This argument that my stock is old and I paid 28% to the wholesaler cannot hold. A retailer when he sells to a consumer should charge only 18%. He will be able to get refund of any additional tax he may have paid to the wholesaler or input tax credit. Consumers also need to be conscious as taxes have been cut on so many products of mass consumption such as washing powder. The Consumer Affairs Ministry has given orders to paste new stickers by December for goods sold on MRP. But price revision should have happened immediately. I would request all FMCG companies to declare transparently in newspapers what was the MRP of their products earlier and after the revision.
An FMCG company directs its trade to pass on the benefit, but trade does not. Who will be held liable under anti-profiteering law?
It is the company’s responsibility to ensure that its entire retail chain follows its directives on pricing. If a trader is not selling a good at revised MRP, then it is the responsibility of the company. It will have to respond to the Anti-Profiteering Authority on this. Action can only be taken against organised players as they are the ones who decide MRP. We don’t want that industry should suffer. But, at the same time, consumers should also not suffer. Will the authority also act if the consumer is a large company with a large number of suppliers? This is a subject of mutual negotiations. This provision is for the common man who is powerless.
Going forward, will we see some action on direct taxes?
In 2015, we gave a timetable for phase-out of all exemptions. We have been following that timetable and have stayed firm on it.