The GST Council (GC) has met 10 times during the past few months and has made remarkable progress on various aspects of the GST legislation.
The GST Council (GC) has met 10 times during the past few months and has made remarkable progress on various aspects of the GST legislation. In the last meeting held on February 18, the Compensation Bill was approved by the GC and the next meeting slated for this weekend (March 4-5) is expected to finalise the CGST and IGST Bills.
A key area which does not appear to be receiving requisite attention is the decision on the rates that will apply to various goods and services under GST. It is understood that a separate team of officials has been working for quite some time on classifying goods and services into various rate baskets. In the fourth meeting of the GC held on November 3-4, 2016, it was decided to have four rates (5%, 12%, 18% and 28%) in respect of goods; however, no decision seems to have been taken yet in respect of services. There is a view that the rate of GST on services would be kept at 18% for all services with a few abatements for specified services, hence a detailed discussion on the rates applicable to services is not necessary.
The repeated emphasis of the government on July 1, 2017, as the date of introduction of GST has meant that most businesses small and large are scampering to get GST-ready by the go-live date. In order for a business to be GST-ready, it is essential to have clarity on rates, as without certainty on rates, no meaningful inferences on the effect of GST on a specific business can be drawn. It is also relevant to note that many countries where GST has been introduced have given complete clarity to business much before GST introduction. In case of Malaysia, businesses were given 18 months to prepare, while in Australia a period of 12 months was given to business.
Hence, the need of the hour is to focus on the rate finalisation exercise with specific emphasis on the following aspects:
i. Decide on the rates applicable to services keeping in mind that the existing practice of having one rate applicable to all services may not be appropriate in the GST scenario. There does not appear to have been any discussion on multiple rates for services and hence it would be instructive to look at the rationale of the same. The economic rationale of having multiple rates for goods based on the affluence quotient of the consuming class is equally applicable to services. For instance, if the GST rate on essential goods is exempted or kept low, by the same analogy, the GST rate on essential services should also be kept exempt or low. There are certain services which are consumed by common people such as telecom, cable/DTH, rail travel agents services, etc, which should ideally be taxed at 5%. Many other services can be taxed at 12% and some services which are consumed by the affluent sections of society can even be taxed at 28%.
You might also want to see this:
ii. Determine the product classification relevant to the rate buckets already decided for goods. This is also a complex exercise despite the rate buckets having been finalised on account of the sheer volume of goods that are required to be put in the appropriate rate bucket. It is understood that the Central Excise Tariff would be the basis of determining the product classifications and all the entries in the tariff would need to be assigned rates that are acceptable to all states. At this juncture, we need to remember that being a diverse country with various state-wise product preferences and tastes, harmonising the GST rate on a specific product having nationwide applicability is indeed a challenging task.
There is no doubt that the GC should focus on getting the draft legislation approved in the next meeting slated for this weekend. At the same time, it is essential that the rate finalisation exercise for both goods and services is also completed expeditiously and announced in early March to enable businesses to move ahead in preparing and welcoming the most significant tax reform that the country has undertaken.
The author is a senior director with Deloitte Haskins & Sells LLP.
Views are personal