Among the 120 services that are currently being taxed, a vast majority is likely to come under the goods and services tax (GST) slab of 18%, while a clutch of them including air travel services, renting of hotels, restaurants and other “bundled” food supply services could get taxed at 12%. A handful of services including transport of goods by road (trucks) and rail and financial leasing including hire purchase could fall under the lowest GST rate of 5%. While the principle that underlies the GST rates fitment, recommended by a committee of officials, is to minimise rate shocks, services would still be the category to witness rate hikes the most as the country adopts the new indirect tax structure, official sources said. Since the current service tax rate is 15% (including the 0.5% Swachh Bharat Cess and an equal Krishi Kalyan cess), levy of GST at 18% would mean a significant increase in the tax liability of consumers of most services.
Even for the relatively smaller number of services to be taxed at 12% in the GST regime, the tax incidence could actually increase in some cases. This is because taxes paid after the abatements permitted by the government work out to be lower than 12% in many such cases at present. For example, restaurant services are currently taxed with 30% abatement, which means actual tax incidence of 10.5%. This could increase to 12% in the GST regime, rather than decrease to 5%. The sources added that all the 60-odd exempt services, which are on the negative list now, would be outside the GST net too. These include services provided by educational institutions, healthcare services, EPFO- Irdai-Sebi services, non-A/c restaurants etc.
However, since the service providers will get greater opportunity to avail of input tax credit in the GST regime, their tax liability could soften if a rate hike is big enough to offset it. Transport of goods by rail is now taxed after 70% abatement on the condition that CENVAT credit has not been taken by the businesses concerned. Since the credit flows will be more efficient in the GST regime, the tax rate is likely to be fixed taking into account the abatements being given now for the new regime to be rate-neutral.
However, at least in some cases, this principle might not be followed and the tax liability of businesses and consumers could rise, analysts said. However, the instances of GST leading to higher tax liabilities and price increases will be very few in the case of goods. Items constituting half of the consumer price index (CPI) basket including food grain will be exempt from GST; many other goods of mass consumption, together another tenth of the basket, will be taxed at a benign 5%; a quarter of the basket will come under either 12% or 18%, the two “standard rates.
The government has maintained that rate fitment will be a “mechanical (rather than discretionary) exercise” as the process has taken into account the real tax incidence at present rather than the nominal rate. For instance, if the nominal tax rate on an item with maximum retail price of Rs 150 and ex-factory price of Rs 100 is 26.5% (12.5% excise and 14% VAT), the real tax incidence on the price to the consumer is just 22%, as the excise duty is virtually levied on the ex-factory price, with abatement for post-manufacturing value addition. Chances are that the item will come under 18% GST, rather than the highest rate of 28%.
The committee of officials has prepared a detailed document on the fitment of GST rates for the consideration of the GST Council. The 800-page document is likely to be vetted by the council as it meets in Srinagar on May 18-19. Source told FE that even after the GST Council approval, the rates will be notified and made public only closer to the July 1 roll-out to avoid market distortion and hoarding. Experts said that the reason for delaying announcement of rates could be to negate the possibility that a manufacturer may ramp up or slow down production till July 1 if it’s known that a commodity will be taxed at a lower/ higher rate under GST.
Apart from final approval to the rates, the GST Council is expected to okay the five draft rules related to accounts and records, advance ruling, appeals and revision, assessment and audit and e-way bill. So far, the Council has approved nine GST rules in its earlier meeting.