1. GST rate baskets: Not all that was hoped for, but holding promise

GST rate baskets: Not all that was hoped for, but holding promise

Too many items are in the top-rate basket, and services, like Goods, will be Subject to Multiple rates, but GST largely should not lead to price increase

By: | Published: May 22, 2017 5:53 AM
Union Finance Minister Arun Jaitley (Reuters)

The fourteenth meeting of the GST Council, on May 18-19, in Srinagar was quite like a tsunami. The Council was expected to approve various draft rules and also discuss the rate structure on various products and services. Not only did it approve the rules, but except a few items (like gold, biscuits, few packaged food items), it agreed on rates, which were also released for public consumption. This was the last major ‘to do’ for the council. On the question of possible deferment of the roll-out date, the Union finance minister said that states have asked him ‘not to blink’. With almost half of the states having approved the State GST laws in their respective assemblies, the stage is set for a July 1 roll-out.

There have been minor changes in the rules compared to what draft ones released earlier. One significant change proposed in the valuation rule pertains to the option of applying 90% of market-value for computing GST in case of related-party transactions. Industry was hoping to see some change in the transition rules. In particular, the expectation was that the percentage of deemed credit (40%) of Central GST liability, in case of transition-stock across the distribution chain, would increase. There is a fear that this would lead to losses on transition stock, leading to destocking of goods in certain sectors. No final decision seems to have been taken by the Council on this as yet.

The rate of tax on goods was largely on expected lines, except the fact that about 19% of the items have been classified under the 28%-rate slab, which is much more than what industry was expecting. The initial understanding was that this rate would apply to a few products, as outlined in the Chief Economic Advisor’s report, but the government later indicated that several other items, which attract an effective rate of over 25% at present, could feature in this slab, too. So, products like consumer durables, cosmetics, several food items including chocolates & nutritional products, suitcases & bags, etc, find themselves in the category of ‘luxury goods’ to be taxed at 28%. While the current effective rate is 24-26% for many of these products, there are few where the current effective rate is below 20%, like in the case of UPS and inverters. The council may want to review such cases and take corrective action wherever needed.

In few cases, even where the current effective rate is high, the products have been kept in the under-18% category since these are items of ‘mass consumption’, such as soap, toothpaste, hair oil and so on. Interestingly, while soap has been considered as an item of mass consumption, washing powder has been classified under 28%, making it seem like a ‘luxury’ item.

For few products, an additional compensation cess has been levied. While this was largely on expected lines, this list seems to have been expanded from what was envisaged earlier. For example, while it was understood to be meant for only luxury cars, even small cars, hybrid motor vehicles and motorcycles above 350cc are also within the ambit of this cess.

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The real surprise, however, was kept in store for services, for which multiple rate slabs have been announced, in line with goods. So, services are also to be taxed at 5%, 12%, 18% and 28%. The rationale seems to be same, i.e., keep the rates closer to the effective rate and ensure that consumers do not get materially impacted. However, a higher rate of 28% was rather unexpected, which would apply on five star hotels, cinema halls, amusement parks and few other services. It is debatable whether cinema is a ‘luxury’ or a service of ‘mass consumption’. Also, the state authorities continue to be empowered to levy entertainment tax, in addition to GST. So, one should not expect the movie ticket prices to come down significantly post GST.

Economy air travel becomes slightly cheaper (6% existing tax vis-a-vis 5% GST) whereas business class becomes expensive (9% to 12%). Real estate is taxed at 12% (stamp duty continues to apply), which is a tad higher than the current effective rate of 10-11%. However, since input credit is allowed to the sector, it would help in reducing the cash component in the business.

For hotels, the rate of GST would depend on the room tariff with exemption for less than `1,000 per day and 12% `2,500. For five star hotels, and those charging above `5,000 per day, 28% GST will be applicable. In a classic GST regime, tax depends on the nature of services, and not on the status of service-provider or value of services. This kind of a tax system is complicated and could lead to avoidable disputes.

Telecom, banking and insurance would be taxed at 18%, all of which might have been contenders for 12% tax. With the rate moving up from the current 15% to 18%, there might be a bit of an impact on prices, though they would get some incremental benefit in terms of input credit as well.

Overall, the GST rates would not necessarily bring cheers to consumers and industry. However, by and large, it should not lead to a price increase as well. The government has reiterated that it expects businesses to pass on the benefits arising from GST, for which a specific anti-profiteering provision has already been introduced. One would hope that it is used as a deterrent and not necessarily as a tool for policing and price control.

With rates getting finalised, the final countdown to GST has begun. The next GST Council meeting, on June 3, could be the last one before the big day. The entire political spectrum of the country needs to be complimented for bringing about such a bold reform which, though far from perfect, holds a lot of promise for future.

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