The Centre and states on Thursday struck a breakthrough deal on the rate structure for the goods and services tax (GST): Items constituting half of the consumer price index (CPI) basket including foodgrain will be exempt; 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”.
These apart, according to the GST Council’s decision, items that currently suffer a real tax incidence of 30-31% will come under the highest rate of 28% and so will the four demerit items — tobacco and tobacco products, aerated beverages, luxury cars and pan masala — on which the taxes now are 40-60%, including cesses. Over and above the28% levy, the four demerit goods will continue to be subject to a specific cess, so that the effective tax rate on them doesn’t fall. The proceeds from this cess — which will be circumscribed with sunset provision of five years and an annual review — and the clean energy cess — which, again, won’t be subsumed in GST — will be used exclusively to compensate the states for any revenue loss in the GST regime. Although a decision on GST rate on services was not taken, it could be 18%, the higher standard rate, 3 percentage points higher than the current rate. Tax on precious metals will be decided later after assessing the revenue flexibility.
While finance minister Arun Jaitley said the new structure will be revenue neutral and won’t inflate prices of articles used by the common man, many analysts feel it amounted to nothing more than “replicating the status quo” and warned that the desired beneficial effect on the economy from removal of cascading of taxes might be hard to come by, as a result. Satya Poddar, partner, EY, said: “With this formula and the tax base conceived, the government may end up denying ITC (input tax credit) on production inputs. The agriculture sector will be one of the worst hit with no ITC benefit for fertilisers, seeds or tractors.”
The GST being structured now will also be significantly different from what was mulled by chief economic adviser Arvind Subramanian in a report unveiled in December last year. Subramanian said on Thursday: “The extra cess will only be on four items (in the case of which he had recommended a 40% GST rate). This and the increase in the high rate to 28% (from 26% proposed earlier) allow the financing of a tax reduction in items like oil, toothpaste, furniture, refrigerator etc (which will be taxed at 18%, instead of 26% suggested earlier).”
According to MS Mani, senior director, Deloitte Haskins & Sells, “It is necessary to ensure that majority of manufactured products are kept at 18% and the temptation to push more products into the 26% slab should be resisted… The classification of goods into the four rate slabs should be done very carefully ensuring that 5%, 12 % and 18% are applied in a fair manner without much scope for arbitrage across slabs.”
Currently, around 100 items are exempt from both the state value-added tax and central excise. Most of these will continue to be exempt in the GST regime. Additionally, rice, wheat and pulses which currently attract 5% VAT and nil excise, will be exempt from GST. Items like edible oils, flour, atta, maida, suji, besan, milk and milk products, ores and minerals and oilseeds that now attract 5% state VAT will come under the 5% GST slab. While around 35% of the items to come under GST are now taxed at 27% or above, in the GST regime only 15-20% of these items will fall in the top 28% bracket. The council had earlier estimated the tax base under the previously prescribed peak rate of 26% at Rs 12.8 lakh crore or a quarter of the total base; but with the increase in rates, several items in this category will now fall in the lower 18% bracket.
It is, however, a fact that the aim of simplicity of the tax structure is hardly achieved. The new structure for goods is only a replica of the current one — which includes VAT rates of 5% and 14.5% and many excise rates including the median rate of 12.5% and the service tax rate of 15%. Krishan Arora, partner, Grant Thornton India, said: “While the consensus on rate structure among Centre and states seems to be a step closer towards timely implementation of GST, the essence of the multiple split tax rates will need to pass the test of industry acceptance on grounds of revenue neutrality and zero cascading across sectors, especially goods falling in the 28% bracket. The government would need to ensure that multiple rates proposed for goods and services do not inherit the legacy issues around classification anomalies.”
The idea of retaining a cess on demerit goods hasn’t gone down well with many analysts, even as the government justified it saying that generating the compensation funds via a higher demerit rate would have been more onerous from the taxpayer’s perspective. Of every 100 rupees collected via the GST rate increase, only 29 rupees would remain with the Centre, Jaitley noted, adding that this meant Rs 1.72 lakh worth taxes needed to mobilise Rs 50,000 crore, the estimated annual compensation amount for states in the first year of GST.
However, Rajeev Dimri, leader, indirect tax, BMR & Associates, said: “Cess, which should not have been levied in a GST environment, is coming in a material way. That’s something industry will not be happy about. They (government) are talking about collecting Rs 50,000 crore from cess, which means the cess rate is going to be a substantial one. Some people are talking about tobacco rate at 65%.”