MUMBAI:
         Higher goods and services tax (GST) rates have sparked fears of a fall in consumption and a slowdown in growth but the reality could be quite the opposite, economists and industry experts said. Price increases do not always hurt demand as consumers’ interest in buying products or services may remain unaffected by any rise in tax rates or other changes in business environment, they said.

The GST Council has increased the service tax on financial services and telecom to 18% from 15%. Many industry executives feel this will impose a burden on consumers and dampen demand.

But recent data, at least in insurance, seems to suggest that consumers take tax increases in their stride. Whenever the government raised the service tax rate or levied a cess to shore up its finances to fund welfare projects, industry did not see much impact on sales.

"There are some financial products that are less elastic in nature," said Ajit Ranade, group chief economist, Aditya Birla Group. "At an individual level, insurance is not so price sensitive."

In June 2015, when the service tax on risk premiums was raised to 14% from 12.36%, income from sale of new policies went up by 13.8%. For that financial year, the industry’s new business income rose 22.55%.

Similarly, in June 2016, the Krishi Kalyan cess took service tax levels to 15%. But in that same month, income from the sale of new policies rose 29%. For the full year, it went up by 26.13%.

So while the increase in service tax rates would mean higher premiums on life, health and motor insurance, that may not necessarily affect business. "When in the past, taxes were increased, it did not impact insurance sales," said V Manickam, secretary general, Life Insurance Council. "This will not have any impact on insurance sales."

Service tax of 3.5% is now levied on the protection part of endowment and unit-linked life insurance policies in the first year and 1.75% from the second year onwards. This will now go up to 4.5% in the first year and 2.25% from the second year. Endowment products have a small protection element and a large savings component.

The big change in the tax structure this time is the introduction of input tax credit for services as well, which will mean a balancing out. Experts said this means the effective tax rate will more or less remain the same. "While tax rates for many services companies would be higher under GST, it is necessary to factor the increase in input tax credits in order to arrive at a meaningful conclusion. The input tax credit provisions would impact different sectors and different companies and banks differently," said MS Mani, senior director, Deloitte Haskins & Sells.

Tax will be different for different companies and banks at various stages of expansion as well.

In a recent case, an automobile company that also owns a financial services arm spent around.`40 crore buying identical furniture for both offices. While the automobile company got the input credit, the financial services companies did not. Under GST, this will not be the case. Services companies are treated on par with manufacturing companies and hence, could get input credit on such expenses.

"Unlike in the past, when VAT (value-added tax) credits on capex and opex were not available to banks, insurance and other services companies, under GST, they would now be able to get tax credits on capital expenditure among other things," Mani said. "This is also facilitated by the broader definition of capital assets in GST. Hence the revenue impact for service providers would need to be worked out on a case-to-case basis."

Take cars — excise duty was increased in 2014. Sales for that financial year rose 3.9% from marginal growth the previous year. Car companies have increased prices several times since then with Maruti Suzuki doing so almost twice a year. But car sales have shown little signs of being impacted.

In FY17, the industry grew 9.6%. Maruti Suzuki, India’s biggest car maker, increased prices in January, just two months after demonetisation. Its sales for that month rose 11%.

Steel is another case in point — prices have risen 12.5% since last May and domestic consumption grew only by 3% thanks to a drastic dip in the months following demonetisation. But steel companies increased prices once again in January and that quarter saw a 6% jump in consumption.

Prices and demand don’t always follow a linear pattern for certain sectors and experts believe it is wrong to assume that price hikes would suddenly cause consumption to drop if all other things are the same. Consumer staple companies typically effect price increases of 4-5% depending on the input cost trend or to improve margins.

This has not prevented volumes from growing. The slowdown in the past couple of years could be attributed to weak rural consumer sentiment.

 23 May 2017, 01:45 PM