With the goods and services tax likely to increase the tax rate for services and perhaps do the opposite for goods, the Centre and states want to soften the blow to a clutch of service industries that are in policy focus by keeping them under a lower-than-standard GST rate. While banking and insurance services, which are being encouraged to bolster financial inclusion, would surely be among the beneficiaries, policymakers, sources said, are drawing up a longer list of services that could attract the lower GST rate.
The standard rate of GST (including the central and state components) proposed by different agencies vary between 18% and 27%; while the finance minister has spoken of the need to keep the GST rate as low as possible for the proposed superior indirect taxation system to really meet the potential to spur economic growth, the Rajya Sabha select committee on GST said the rate should not exceed 20%.
The excise duty currently levied on manufacturing — 12.5% on most items — and the state-level value added tax (VAT) on sales — about 14.5% on most items — add up to 27% now. If the GST rate is fixed at around 20%, it could mean a reduction of the tax rate in the case of these goods. Additionally, the greater facility of input tax credit in the GST regime would reduce the real incidence of tax on goods even further in the proposed regime. However, the same GST rate would imply an increase in incidence of tax on services, given that the current service service tax rate of 14% is way below even the “low” GST rate of 20% proposed by the select panel.
With GST would come the states’ power to tax services. It would also expand the taxation power of the Centre beyond factory production (excise) to cover all subsequent sales till the end consumer, with credit at each stage for taxes paid previously.
Tax experts said the increase in applicable tax rate on services could be a problem for the end consumer but not for businesses as they use tax credit on input services and raw materials for meeting the tax liability on the output services provided to their clients.
“Levying a merit rate (lower than the most-in-currency rate) of GST on a host of services availed of by the end consumer could help avoid inflationary tendencies. These services should be well defined to avoid any classification dispute,” said R Muralidharan, senior director, Deloitte in India.
Official sources said GST on banking services would be applicable mainly on charges such as processing fee and guarantee fee, not on interest payments, which are the largest source of revenue for banks. In the case of insurance, GST would be applicable only on the risk premium, not on the premium that goes as investment part of the policy.
“Wherever GST has been introduced, an inflationary trend has been noticed in the short term. It would therefore be a good idea to levy a lower rate on certain business-to-consumer services such as banking, telecom and insurance,” said Pratik Jain, partner at KPMG.
Sources said central and state GST laws will have provisions to ‘unblock’ utilisation of input tax credit for the services industry that will to some extent mitigate the impact of an increase in the tax rate.
GST, which was slated to be implemented from April 1 next year, would apparently miss the deadline as there is no political consensus in Rajya Sabha on passing the Constitution (122ndAmendment) Bill. “Missing the April 2016 deadline does not mean GST could be introduced only in 2017. Unlike income tax, which applies from year to year, GST is a tax on transactions and can be introduced even in the middle of a year,” said an official.