GST inception will reduce indirect tax rate by 5%

Written by fe Bureaus | Updated: Jul 30 2010, 04:40am hrs
The recent announcement on GST by the finance Minister can be summed up as the step in right direction. A dual rate structure with two components, one levied by the Centre (CGST) and the other by the state (SGST), seems to be the call of the day. A lower rate of CGST at 6% (for essential goods), a standard rate of 10% for other goods and CGST rate of 8% on services has been advocated by the Centre. States are expected to follow the same rates for SGST also. This should ensure a rate of 12% to 20% in the first year of GST. The three year plan for moving to a GST rate of 16% has also been put in place.

The impact could be beneficial, neutral or adverse depending upon the present tax treatment. Goods presently are subject to central excise duty on manufacture, few products like pharma attract duty at 4.12%, whereas the standard rate is 10.30%. VAT/sales tax on sale of goods are presently 4% to 5% as lower rate and 12.5% to 15% as standard rate in different states. In other words, currently, manufactured goods are subject to indirect taxes to the extent of 9% or 25%.

Inception of GST at the proposed rates, therefore, will be beneficial for many goods as the peak rate of indirect tax would get reduced by around 5% approximately. White goods, which currently attract about 25% indirect taxes, could gain by a 5% reduction in duty rate. In case of cars, the peak rate of central excise duty would be reduced from 22% to 10% and VAT from 12.5% to 10%, making cars cheaper by nearly 15% in the future. The steel industry presently attracts around 10% excise and 5% VAT and would expect to be classified under the lower rate category of 12% GST, the impact could thus be marginal. So, not just the India Inc, end consumer stands to gain in the proposed scenario.

However, there could be certain aberrations such as the pharma goods, which attract around 9% indirect tax, under GST may be placed at 12%, which could still entail an increase of 3%. Services, which attract service tax of 10.30% would be costlier at 16% GST rate. This could be a cash flow issue for businesses. The better credit mechanism may help overcome this impact. The list of exemptions and impact on customs duties by way of SGST would also depend upon the fine print of GST and impact thereof would need to be evaluated. In a nutshell, the proposed rate structure seems to be beneficial on an overall basis, a win-win deal that the Centre and States need to fine tune.

The writer is tax partner, E&Y