Despite the higher tax rates to be applicable to precious metals and services under the proposed goods and services tax (GST) regime as per the model under discussion, the actual impact on these sectors may be minimal due to the removal of a lot of hidden taxes and a smooth flow of tax credits, say experts.
Chief economic advisor Arvind Subramanian has recommended a standard GST rate of 17-18% for all services, higher than the 14.5% tax on services applicable now. He also recommended a 2-6% tax on precious metals, which is above the 1% VAT applicable on them in most of the states. Taxing precious metals closer to the upper limit of 6% would help in keeping the standard GST rate lower for most of the goods. Experts said the higher tax rate proposed for precious metals actually subsumes many hidden taxes on them and brings many parts of the jewellery industry so far outside the tax net into the tax base.
Prashant Deshpande, senior director, Deloitte in India, said, “While the lower rate of 1% VAT is a visible indirect tax on gold and other gems & jewellery items, there are other taxes that apply in this sector, which would get subsumed in the GST. For example, gold dore imported into India and refined into bullion is charged excise duty of 9%. This duty is inbuilt in the cost of making jewellery.” said Deshpande. Currently, refining scrap by melting, assaying and refining into gold bullion is exempted from excise duty, and has affected the level playing field between local and imported gold, which attracts 10% customs duty. The CEA panel suggested that bringing precious metals such as gold into the tax base at 2-6% rate would help in expanding the tax base and help in recovering the loss of revenue from raising the service tax threshold from R10 lakh now to the proposed R25 lakh. Bringing a level playing field in the sector too probably was a consideration for the panel, said experts.
Amit Kumar Sarkar, partner, Grant Thornton India, said the 2-6% rates under consideration is within the tolerance range for dealers in precious metals and certainly far lower than what was feared. “Comparing with the present indirect tax structure, the effective GST rate for precious metals (even assuming the highest rate of 6%) actually is slightly higher than the current indirect tax rate burden. Hence, it is unlikely that the GST rate proposed on precious metals would actually adversely affect the sector,” said Sarkar. In the case of services, the tax rate is likely to go up from 14.5% now to the rate to be eventually decided by the GST council. At 17-18%, it may be a noticeable increase of two to 3 percentage points. It also remains to be seen whether the GST council would accept the proposal to remove all abatements currently given to specific services sectors such as restaurants. There are only very few business- to-consumer services such as air travel, hospitality and life insurance services. For all business-to-business (B2B) services, there would be a smooth flow of input tax credits and cross-utilisation of credits between central and state taxes.
“Other than life insurance services, there are very few service categories that are predominantly catering to the retail consumer. As a result, even though the effective tax rate may see a sharp increase, as long as the proposed GST structure allows for free credits of input taxes in the hands of the B2B customers of such services, the effective burden of higher GST rates on services may be significantly minimised,” said Sarkar.
Telecommunications, transportation, finance, insurance, and IT are some of the service industries which do not at present get any input tax credit for the VAT paid on capital goods, the CEA panel had pointed out.