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The countdown has begun! The announcement of GST rates is again showcasing the steady approach and determination of the government of India towards introducing the much-awaited GST regime. A four-tier GST rate structure ranging from 5 percent to 28 percent, plus a cess on certain commodities has been recommended by the GST Council. A comprehensive list of commodities falling under each rate slab is yet to be notified. However, this rate structure is enough to create a buzz in the industry to speed up the preparations for the new regime. India Inc is eagerly waiting for the finer details to become public.
The four GST rates are 5 (lower rate), 12, 18 (standard rates) and 28 percent (higher rate). Besides the 4-tier tax structure, the GST Council has announced zero rating of items of basic necessities such as food grains. Further, approximately 50 percent of items forming part of the CPI basket have been proposed to be kept in the no tax basket. Some of the hitherto untaxed items (such as agri products) and sectors (such as education and health care) should hopefully feature in the list of zero rated supplies. Keeping essential items in the zero rate or exempt basket would regulate inflation and be consumer pocket friendly at the same time.
The Centre’s initial proposal of 6 percent as the threshold rate has been tweaked and reduced to 5 percent instead. Lower rate of 5 percent for items of mass consumption would make GST less regressive. For industry, tax costs might even go down due to commodities taxable at the lower rate provided the credits on procurements are fully allowed. While the lists are yet to be rolled out by the GST Council, sectors like transportation, logistics, storage & warehousing, financial services, etc, merit coverage in the list.
Furthermore, a standard rate of 12 and 18 percent for most of the items and services should keep the overall tax incidence below or around the existing tax costs. The inflationary impact on standard rated commodities should be minimal but services may cost more due to a push to the 18 percent slab.
As per the statement of the Union finance minister, a 28 percent tax slab has been proposed for the items which presently face a 30 to 31 percent tax incidence (including excise and VAT). The industry is most concerned about the items to be covered in this list. Ostensibly, the commodities falling under this rate slab would cause lesser tax outflow under GST regime versus the present regime (from 30/31 to 28 percent). However, on closer analysis, it emerges that the GST rate of 28 percent on currently standard rated goods would lead to a higher tax incidence as it applies on final stage of consumption in comparison to excise duty which applies at the stage of manufacturing. Thus, keeping the current standard rated goods in this list will enhance the tax burden on such goods. This will, clearly be, contrary to the assurance given by the Union government time and again that the overall tax incidence on most commodities will go down with the advent of GST. Putting a very restricted range of commodities in this tax slab is quintessential to keeping the inflationary impact of GST on common man at check.
From the perspective of overall tax incidence, levy of cess along with tax at 28 percent on luxury items, sin and demerit goods viz; luxury cars, tobacco, etc, ensures that these goods face a similar tax burden as is faced presently. Levy of compensation cess on certain luxury and sin goods in addition to tax is, however, likely to add complexities to the indirect tax administration and compliance environment for such product lines. Though the cess has been proposed to be levied for initial five years only, this would transit the complexities of existing tax regime to GST which could have been easily avoided by keeping a higher GST tax rate for these products. Thus, dealing with another tier of tax would pose administrative challenges before the industry. Accordingly, modalities around levy of cess, point of levy, credit eligibility, etc, will be critical aspects to watch out for. Also, the GST council needs to build in enough safeguards in the fine-prints of its recommendations such that the industries liable to pay cess are not left grappling with uncertainties around jurisdiction, differences in rates of cess across different states and possibility of increase in rate of cess at the whims and fancies of the central or the state governments.
Historically, it has been witnessed that multiple tax rates have led to classification issues and disputes. A micro level impact analysis of the rate structure across all sectors and products will however be ascertainable only when the complete schedules are made available. The country continues to hope that final lists of GST rates will be in sync with the overall stated intent of the government behind introducing GST and hence the total indirect tax incidence on the common people would come down. Also, it is hoped that there would be seamless input tax credit to businesses leading to a reduced effective tax on goods and services.
With a headline message that the GST rates would not vary significantly from the rates under the existing indirect tax enactments, the GST Council has successfully marked a crucial milestone towards the timely rollout of GST. These indicators are acting as catalysts in keeping the industry exhilaration for GST alive. This proactive approach also reassures India that the policymakers will put in their best efforts for a timely rollout of GST.
- By Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP with inputs from Poonam Harjani and Apoorva Yadav