The Impacts of Cutting GST tax on Batteries and Related Products

Question: Discuss about the Impacts of Cutting GST tax on Batteries and Related Products. Answer: Just like the production of any other commodity in Australia, batteries production is governed by regulations. Tax has to be paid to the government for production of goods or services. The current GST levy tax on batteries of 28% is very high according to the complained posed by the battery manufactures. The high tax is preventing them from producing many batteries (Autocarindia.com, 2017). The government has an aim of a complete transformation from petrol to electric vehicles; however, this decision is interdependent on batteries production. The lower production level of batteries is limiting the supply and thus the final output can only sell at higher prices creating an obstruction to the governments objective of achieving a 100% shift to electric vehicles by the time we get to 2030. Now the question is how the tax levy affects the production level? Since tax is a mandatory obligation of which has to be paid even if the company is making losses, it is a cost to the production proce ss and it cannot be ignored. The higher tax levy thus makes the production operations more expensive. On the other hand, the producing companies may shift the tax incidence to the consumers, but the tax is so big such that the producers obligation is still too large after transferring some of the incident tax. There are several factors that affects the transfer such as elasticity of demand to battery price changes. The Indian battery market will benefit from the tax reduction to 5% bracket since it will translate to a lower production cost and the quantity of batteries produced will rise; the higher quantity level will result in falling prices. Selling at a lower price will benefit the consumers causing their surplus to rise. The producer surplus will rise for selling many units though at a lower price. At the high tax rate, the equilibrium point is at point i with quantity Qi supplied at a high price b. the consumers surplus at the high price is area abi and the producer surplus is area bdi. The reduction of tax will lower the cost of production and the supply level will shift to the right to the curve S2 (low Tax) (Quantity Qc). The increase in supply will fall prices to fall to level c. the consumer surplus will rise from area abi to aihc and the producer surplus area will increase from area bdi to chfe. The deadweight loss equal to igf will be experienced. A rechargeable battery being an input for electric vehicles means that the two are complement goods. Since the price for batteries is expected to be lower from the reduction of GST, we shall analyze the impact of this on the electronic vehicles. Many economists have laid out an idea that the price for complement goods affect the other good in an opposite manner (Spacey, 2016). For this case, the lower price for batteries will cause the supply for batteries to rise, and the price will fall; consequently, the demand for electric vehicles (the complement good) will also rise (Munson, 2014). The battery storage manufacturers will make huge profit in the short run since they will produce at a lower cost and the demand will be high, hence the units sold will be many. Profit in the long run will be reduced since the high profit will attract many competitors who will share the profit until its exhausted. Qc is the current quantity of electric vehicles on demand and Pc is the current price for batteries. If the GST is lowered according to the proposal, and the battery price falls to Pf in the future, the demand for electric vehicles will in future rise to Qf. This is because complement goods have negative cross elasticity of demand (Pettinger, 2012). There are two primary types of vehicles on demand; one is the petrol vehicles and the other is the electric vehicle. If a consumer demands one of the two types, he/she does not demand the other. For this reason, the two types of vehicles are substitutes. The choice of a substitute good is affected by the price of the other good in a similar manner (Chand, 2016). If the price of a good falls, the other goods demand falls because most consumers will demand more of the good with the falling price (Aggarwal, 2011). Substitutes have a positive cross elasticity of demand (Parikh, 2010). The current demand for petrol vehicle is quantity Qc, while the price for batteries is PC. The GST levy reduction will lower the future price for batteries to Pf, the demand for petrol vehicles will fall in the future to Qf since consumers will demand more electric vehicles. The analysis above on the impact of the reduction on GST tax levy for batteries have confirmed that in fact there will be an increased demand for electric vehicles and a decreased demand for petrol vehicles. The government is aiming to lower the usage of petrol vehicles due to environmental concerns raised by carbon emissions. Thus lowering the GST will help in reaching the 2030 goal of 100% electric vehicles and thus the minister should consider approving this proposal. References Aggarwal, K. (2011). CPT General Economics. S.l.: S Chand CO LTD. Autocarindia.com. (2017). EV industry wants lowering of 28% GST on batteries. Autocar India. Retrieved 2 September 2017, from https://www.autocarindia.com/car-news/ev-industry-wants-lowering-of-28-gst-on-batteries-405298. Chand, S. (2016). Effect of Demand Curve on Substitute Goods and Complementary Goods | Micro Economics. YourArticleLibrary.com: The Next Generation Library. Retrieved 2 September 2017, from https://www.yourarticlelibrary.com/economics/effect-of-demand-curve-on-substitute-goods-and-complementary-goods-micro-economics/8914/. Munson, I. (2014).Economics Explained: Complements, Substitutes, and Elasticity of Demand. EconoGIST. Retrieved 2 September 2017, from https://www.econogist.com/home/complements-and-substitutes. Parikh, V. (2010). Substitutes and Complementary Goods. Letslearnfinance.com. Retrieved 2 September 2017, from https://www.letslearnfinance.com/substitute-and-complementary-goods.html. Pettinger, T. (2012). Complementary Goods. Economicshelp.org. Retrieved 2 September 2017, from https://www.economicshelp.org/blog/glossary/complementary-goods/. Spacey, J. (2016). 11 Examples of Complementary Goods. Simplicable. Retrieved 2 September 2017, from https://simplicable.com/new/complementary-goods.