BU1003 Economics for Sustainable Business : Goods and Services Tax

Introduction

On the subject of implementing the Goods and Services Tax (GST) in India, the study identifies the impact of lowering the GST levy on batteries from 28 percent to 5 percent on the Indian battery market in terms of price, quantity demanded, consumer and producer surplus (Mishra, 2017). Also, the study evaluates the impact of the same on Electric Vehicle market as well as the petrol vehicle market in India. Lastly, the influence of the proposal of lowering the GST on batteries on the Indian government’s target of 100 percent EV nation by 2030 has been discussed in the essay paper as well.

Q1

By lowering the GST levy on batteries from 28% to 5%, the purchasing price of battery will be reduced. As the consumers have to pay less tax, it can impact the selling price of a battery (Creedy, 2016). In the meanwhile, if the other factors such as supply side remain constant, a price drop due to tax reduction can increase the quantity demanded in the free market.

As described in the above figure, decrease in the GST levy on batteries from P1 to P2 will also reduce the price of batteries. Therefore, the quantity of battery demanded will increase from Q1 to Q2. Evidently, the consumer and producer surplus of battery market will be affected due to decline in the GST levy. Clearly, lower price of batteries due to tax deduction should increase consumer surplus. In the meanwhile, due to price fall in batteries, the quantity demanded of the product will be increased. Hence, the consumer surplus will be increased (Cowan, 2012). On the other hand, lower price of batteries will reduce the producer surplus if other factors remain constant. Invariably, if the cut down on the GST levy reduce the price, it contributes towards lower potential producer surplus as goods supplied will be reduced (Ma, 2015). Therefore, the triangle of producer surplus will be smaller indicating lower producer surplus.

Q2

However, the reduction in the GST on batteries will reduce the manufacturing cost of the EV that will further help the EV producers to reduce the price of the vehicles in the market. Hence, the fall in the price of EV being a complementary product will result in an increase in the demand for the product in the short run (Balkyte & Tvaronavi?iene, 2010). A diagram has been presented herein below for further understanding:

It can be seen from the above diagram that reduction in the tax on battery will reduce the price of EV in the short run. However, the demand curve will stick at D and there will be no change in the quantity supplied in the short run. Hence, an increase in the quantity demanded for EV can be evident from Q1 to Q2. Therefore a rise in the profitability will be seen in the case of EV as no change is occurring in the profit margin for the EV producers (Bochet, ?lk?l?ç, Moulin & Sethuraman, 2012). On the other hand, in the long run, the increase in the demand will result in a rightward shift in the demand curve from D to D1, whereas the quantity supplied will also increase from S1 to S2 due to better utilisation of resources (Please refer to the diagram given below). Hence, no changes will be evident in the price of Electric Vehicles. However, the increase in the consumption in the long run will further enhance the profitability of the EV producers (Balkyte & Tvaronavi?iene, 2010). A diagram has been presented herein below for better understanding:

Q3

In the case of substitute goods such as petrol vehicles, the reduction in the GST rate from 28 percent to 5 percent on batteries will reduce the price of electric vehicles more than petrol vehicles. Hence, a reduction in the price of EV will directly impact the quantity demanded of petrol vehicles in India (Bochet, ?lk?l?ç, Moulin & Sethuraman, 2012). Using the theory of demand, a diagram has been presented herein below for better understanding:

On the basis of the above diagram, a fall in the price of EV from P to P1 will lead to a fall in the quantity demanded for petrol vehicles from Q to Q1. Hence, the sales of petrol vehicles will be significantly impacted by the new policy of the Indian Government.

Q4

The proposal of lowering the GST on batteries by solar energy storage manufacturers will certainly help the plan of the Indian government to reach a higher percentage EV nation by 2030 although it is next to impossible to achieve the tagline of 100 percent EV nation. Understandably, the deduction in GST levy on the batteries will increase the demand for the batteries as prices will drop down. In this scenario, due to drop in prices, the price of Electric Vehicles will be lower as the battery is complementary goods for EV. Hence, lowering the GST on complementary goods of EV will be helpful to reduce the price of EV in the Indian market.

On the other hand, EV can be identified as a substitute product for petrol run vehicle. Therefore, increase in demand for EVs can create a negative impact on the petrol run vehicle market. Clearly, the target audience will prefer to purchase EVs in the changing economic scenario. Therefore, the government’s push to reach a 100 percent EV nation by 2030 will get a boost. However, not all the people will buy EV depending on certain factors such as lack of electricity charging stations in rural areas. In the meanwhile, considering the environmental factors and economic benefits, the Minister of State for Power, Coal, and New & Renewable energy should consider the proposal of lowering GST levy on batteries.

Conclusion

It can be seen from the above analysis that the fall in the GST rate on battery will directly increase the demand for electric vehicle in the Indian market. On the other hand, it is quite difficult to achieve the target of 100 percent EV nation by 2030 due to lack of infrastructure and innovations in the petrol vehicle industry. Furthermore, it is important to note that the reduction in the price of battery will also reduce the cost of petrol vehicle by a smaller amount. However, the 5 percent GST policy will help the Indian Government to achieve a higher target as compared to the 28 percent GST rate.

References

Balkyte, A., & Tvaronavi?iene, M. (2010). Perception of competitiveness in the context of sustainable development: Facets of “sustainable competitiveness”. Journal Of Business Economics And Management, 11(2), 341-365.

Bochet, O., ?lk?l?ç, R., Moulin, H., & Sethuraman, J. (2012). Balancing supply and demand under bilateral constraints. Theoretical Economics, 7(3), 395-423.

Cowan, S. (2012). Third-Degree Price Discrimination and Consumer Surplus. The Journal Of Industrial Economics, 60(2), 333-345.

Creedy, J. (2016). Measuring welfare changes and tax burdens (4th ed.). Cheltenham, UK: Edward Elgar.

Forstater, M. (2017). Economics (6th ed.). London: A. & C. Black.

Ma, T. (2015). Long-Run Industry Supply Curve and Producer Surplus. Journal Of Economics And Development Studies, 3(2).

Mishra, T. (2017). Solar energy storage manufacturers want lower GST levy on batteries. The Hindu Business Line. Retrieved August 2017, from https://www.thehindubusinessline.com/economy/policy/solar-energy-battery-gst/article9758357.ece

Taylor, T., Stonebarger, T., & Leven, J. (2015). Economics (5th ed.). Chantilly, VA: Teaching Co.