Prices will go up: Economist Jose Sebastian

THIRUVANANTHAPURAM: Tax and trade experts say that no amount of hand-wringing by finance minister Dr T. M. Thomas Isaac can prevent the inevitable. Prices will go up under the GST regime. It is felt that prices will surge despite the fact that the tax on a large number of commodities had gone down. Ironically, it is GST’s biggest advantage, its power to discourage tax evasion, that will stoke inflation.

Economist Jose Sebastian points out a peculiar aspect of evasion. “It is not as if the sellers were pocketing all the money evaded. They share it with their clients. Any Malayali would tell you how he conspired with the jeweller to do away with taxes,” Mr Sebastian said. “Now, with fool-proof online systems in place, evasion is virtually impossible. Traders are forced to include taxes. The impact has already begun to reflect in the price of gold,” he added. Further, since both the centre and the state are involved in the collection of tax, there will be a double check.

“You might manage to palm off a state official but then the guy from the centre will be waiting around the corner,” said Alikutty Hassan, a steel retailer. Even organised trade selling commodities with a lower GST might find it difficult to reduce prices. “Earlier most of their raw materials would have been sourced from the non-taxpaying informal sector. Post GST, if organised trade want to claim input tax credit, their suppliers too should be tax compliant. And as everyone imposes tax, prices automatically go up,” Mr Sebastian said. Another reason why prices are going up is the lack of clarity surrounding the new GST law. But this could be a temporary hitch.

There are a number of goods and services for which there is no clarity about the tax rate, electronics goods for instance or a service like dry cleaning. “Traders have a tendency to interpret a non-classified item as having attracted a higher tax rate. They are erring on the side of caution so that if at all there is a reclassification in future they will not be affected,” said Ananthabhadran, a chartered accountant. He said that the tax administration in the country was notorious for its unstable tax slabs. “On a whim, they can change rates with retrospective effect. By adopting a higher tax rate, traders are only countering a future loss,” the chartered accountant said.