Sauce for the Goose is juice for the Gander....on Indirect tax policy change!!

From Darkness unto Light………….

Now that the government has decided to rationalize the indirect tax system, it is good news for we Indians. The consequences are interesting. Their decision will bring down indirect tax from 28% to 40% to around 20%. This means in daily transactions the consumer is endowed with around 12 to 20% more of purchasing power which is like getting a wage hike to that amount. Good news for the economy. In the long run it will only be GST(general sales tax) and no excise. GST in Central and State levels.

The fact is more rationalization can occur in the petroleum division, where the cost to retail petroleum is only around rupees 26. The rest is tax. Marketing a bottle of beer costs only around 16 rupees which is retailed at 85 and so goes on Indian consumers woes. Since petroleum is a restricted sector it might take more time and more inflation consequences before the government will act there. So is liquor. The other products will become cheaper and will be a relief to Indian consumer and a boost to Indian economy.

Usually 40% of the cost of a product is Fixed Cost and 60% variable cost. On top of it consumer pays close to 28 to 40% more indirect taxes like excise, sales, vat and cess taxes, which inflates the prices causes for inflation, reducing even the demand for the product and tampering with the expansion of the economy rationally. Moreover the government taxes this on Sales rather than bottom line which makes this effect more severe burden and pressure on the economy and citizen. It unleashes contractionery forces on the economy, which creates inflationary forces and reduce purchasing power of citizen. It can tamper with labor efficiency and generate unemployment in future, even recession. Reducing small amount of indirect taxes may not transmit since the manufacturers know that people can pay and don’t pass on those benefits to consumer. Abolishing these lines of taxes is the only way out. This will raise personal income and more direct tax revenue to the government compensating for taxes lost thus. This is depicted in the theories of Laffer curve in economics.

Another rational policy that can be undertaken to relieve tension among participants is reducing premiums or even abolishing premiums on IPOs. The preset system affects redistribution of income, from small investors to high income individuals which is a contradiction and irrational per se.

We can expect better purchasing power for rupee, bettered living standards, better stock prices which all might get effected in expansion of the economy, by rationalizing all our policies, in future.