A significant step forward towards GST implementation, the decision of all-powerful GST Council reaching consensus on a four-tiered GST rate structure, has much to look forward to. The clear intent of the government is to have a progressive indirect tax structure for the economy as the overall rate framework seems to have addressed a common man’s ask. At the same time, the announced rates came with a tone of surprise for the industry and have raised some concerns upon which further clarity should emerge when the commodities and services are precisely allocated to the respective tax slabs.
The four-tiered rate structure ranges from 5% to 28%, with certain products being exempt/zero-rated. The categorisation of products has been proposed in a manner that essential commodities and items of mass consumption by common people would bear a lower tax. Around half of the items forming part of Consumer Price Index have been stated to be kept in the no-tax basket which might even reduce the tax outgo for a common man on daily consumables. The slab of 12% should ideally cover all the categories of goods which currently enjoy concessional/merit rate taxation for excise as well as VAT purposes. Further, it’s widely being hoped that 18% slab would cover most of the products. This is important to ensure that ultimate consumers do not see much of a difference in monthly consumption budget on account of enhanced the tax costs.
The major source of unease for the industry is the lack of clarity around coverage of commodities under the highest tax slab of 28% GST. This list certainly needs to be restricted. It need to be noted that not all the taxes (such as excise duty) apply today on final price at which the goods are sold to the final consumer. The current effective rate of indirect taxes on most standard rated commodities ranges between 24-26%. Thus, covering all the products which currently attract standard rate of excise duty and VAT under the highest 28% slab would burden such commodities with higher GST incidence and would be a rude shock to the industry as well as to the commoner. With the hope that 28% tax slab will apply on only limited categories of goods alone, the overall inflationary impact of GST, if at all, should be marginal.
To offset the lower rate of GST for basic necessities, certain category of items which include luxury products and demerit goods such as tobacco and pan masala would face the highest slab along with an additional cess in a manner that overall tax on these products remain the same as of today. The revenue proceeds from this additional cess along with clean energy cess on coal is meant for compensating the states for their loss of revenue. While a sunset clause of five years has been promised for this compensation cess, the added complexities for complying with cesses is difficult to digest under the GST regime. Dealing with another type of tax would pose operational and compliance challenges before the industry. What must be ensured by the GST council is that this compensation cess should not distort the flow of credits through the supply chain which may lead to heavy cascading at multiple stages. Clarity around point of levy of cess and strict uniformity in reporting requirements and rates of cesses across states are some other obvious asks to maintain a uniform tax structure across the nation which is one of the prime drivers behind implementation of GST in India. The stated intent behind levy of cess is to maintain the current tax structures of certain commodities which is antithesis to the government’s endeavour to bring down overall tax incidence on goods particularly on the ones manufactured in India.
As far as services are concerned, the overall impact might be on a negative side as standard rate of 18% would increase the tax burden noticeably as against existing 15%. Most services sectors, including telecom, professional services etc are therefore likely to increase the consumer price or witness a negative impact on bottom line at least in the initial phase of GST implementation. In the interest of the common man, the GST Council should, however, consider keeping some of the essential services, such as healthcare, education, etc, at zero-tax slab. Whether any services will feature in the list of 12% slab or will the concessions to certain services such as transportation, construction services etc would continue in the form of abatements remains an unanswered question. Operationally, merit rate taxation of 12% on such services should work better as it resolves ambiguities around impact on input tax credit chain.
It is pertinent to note that precious metals including gold are proposed to be taxed at a lower rate. However, the decision regarding the GST rate on gold is still pending and would be decided by the GST Council later depending upon the flexibility to meet the revenue targets. This effectively takes the Indian GST rate structure to have up to seven different classes within which various goods and services would get classified. This might lead to continuance of classification issues and disputes under GST as they exist even today, since the tax authorities would try to push the items to higher tax slabs while the tax payers would want to take cover of lower bracket for their products and services. Detailed schedule of the goods and services classified under different slabs is the next big thing under industry’s watch list. The government should release these detailed schedules well in time as that is critical for the industry to carry out GST impact analysis for their business post which price declarations, distribution schemes, margins for channel partners and sales incentives would also need a revision.
The overall slant of the GST rate structure undoubtedly is upon minimising the inflationary impact upon transition to GST with key focus upon the pocket of the less privileged and lower middle class of the society. Given the pace at which the government is heading to meet its proposed deadline of April 1, 2017 for GST rollout, its efforts are remarkable and ought to be applauded by the entire nation. Even India Inc is amazed that the government might actually be ready to implement GST while it is still preparing its systems for transition. This is the time when all GST stakeholders are putting in their best efforts to make the most out of these revolutionary indirect tax reforms.
(With inputs from Poonam Harjani and Himanshu Gupta)
The author is leader, indirect tax, BMR & Associates LLP. Views are personal