GST Reduction Does Not Always Lead to Lower Consumer Prices

A reduction in GST on the final product usually benefits the consumer. Similarly, when GST on inputs is reduced for products or services that do not attract tax on the final output, the customer also gains because the input cost reduces. However, where input tax credit (ITC) is available, it is not treated as part of the cost.

A manufacturer considers only the actual cost of raw materials and inputs. If the GST rate is reduced, the amount available as input tax credit also decreases, and the manufacturer must pay this difference in cash. In such cases, a reduction in GST on raw materials can paradoxically increase the manufacturer’s cash outflow, making it difficult to reduce the final product price.

For example, GST on cement was reduced from 28% to 18%. According to accounting standards, if input tax can be set off against GST payable on the final product, such input tax is not added to the product’s cost.

If cement is used in a commercial project, the 28% tax paid on cement does not become part of the project cost, because it is set off against the 18% GST payable on construction services. Therefore, contractors generally do not include the GST paid on cement when determining their selling price.

However, when GST is reduced from 28% to 18%, the input tax credit also decreases. The contractor must now pay this difference in cash. Thus, a lower GST rate on cement does not reduce the price of a commercial project.

On the other hand, if the contractor is constructing residential flats, input tax credit on cement is not allowed. In this case, the GST paid on cement becomes part of the construction cost. Therefore, when the tax on cement is reduced, the buyer should receive the benefit.

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