India’s most ambitious tax reform since Independence took a giant leap forward on Thursday with the Centre and states agreeing on the rates for the Goods and Services Tax (GST). To be implemented from April 1, 2017, the GST–which will subsume several taxes including excise duty and VAT-–will have four rates. (TimesOfIndia News)
Currently, there are 15-20 tax slabs between the Centre and states. Coal, luxury and sin goods (eg cigarettes and alcohol) will attract cess in addition to the GST. Finance minister Arun Jaitley said the GST Council had agreed to zero-rating for nearly half the items in the consumer price index (CPI) basket as well as major foodgrains, while goods of everyday use would attract 5% GST, as against 6% proposed earlier.
In addition, there will be two standard rates of 12% and 18%, a move meant to blunt the Congress party’s demand for a standard 18% levy. White goods and similar products will face 28% tax, instead of 26% suggested by the Centre earlier.
The cess on luxury and sin goods, and the clean energy cess on coal, should help the Centre mop up around Rs 50,000 crore to compensate states for any revenue loss due to GST.
“There will be a sunset clause of five years, which will be reviewed on a year to year basis… Compensation through tax collections will have a cascading effect. There will not be any additional levy,” finance minister Arun Jaitley said, while explaining the rationale for the cess that has been questioned by many. While tobacco currently attracts 65% levy, the current rate on aerated drinks is around 40%. The government suggested that the rate structure would be non-inflationary as rates on several items would come down. The finance minister said that the burden on the consumer would “hopefully” be lower.
He said that instead of the current slab of 30-31% on products such as white goods, which includes excise duty of 12.5% and state VAT of 14.5%, the highest slab under GST will be 28%. The additional benefit of two percentage points that will accrue to the government is being used to reduce the lowest slab from the proposed 6% to 5%. In addition, some products such as soaps, oil and shaving sticks, which would have gone into the 28% bracket, will now move to the 18% slab.
The cess is something that has still not found acceptance. “The ideology to come out with the rate structure is to avoid any negative impact on the CPI from inflation perspective. Hence the goods of mass consumption will have a lower tax incidence. While one can have some guesswork around the GST rate for some of the products, the devil is in the detail when the final classification list will be released which is the most challenging task for the policy makers.
Still, imposition of cess is going to be an area of concern from the practical and administrative perspective,” said Santosh Dalvi, indirect tax partner at consulting firm KPMG’s India office.
Some also suggested a low rate for education and health. “Lower rate of 5% for items of mass consumption along with zero rated tax structure for essential commodities would make GST less regressive and pocket friendly for common man.
Much to the joy of the consumer and industry, tax costs might even go down for commodities to be taxed at 5% provided the credits on procurements are fully allowed. While the lists are yet to be rolled out by the GST Council, all essential commodities and services, including education and health care should feature in the list of special concessional rate of 5% (if not zero rated),” said BMR indirect tax leader Rajeev Dimri.