The Goods and Services Tax (GST) Council on Saturday fixed the GST rates for a clutch of items, including gold, diamonds, textiles and garments, footwear and biscuits, almost completing the exercise of rate fitment. On track to roll out the new indirect tax regime from July 1, the apex body of central and state finance ministers also approved the rules pertaining to transition provisions and filing of returns, in the process addressing some concerns of the industry over the earlier drafts.
Finance minister Arun Jaitley said he was “quite confident”of launching GST from July 1 and all state finance ministers, except West Bengal’s Amit Mitra, shared the optimism, after having a detailed interaction with the GSTN over the level of IT preparedness of the government and the industry.
Significantly, the council also decided to enhance the deemed credit for transition stocks in case of items that attract GST at 18% or 28% to 60% of the tax liability, while retaining such credit at 40% for others, addressing a major concern of the industries, including firms manufacturing automobiles, FMCGs, white goods and aerated beverages. If the owner of stocks has invoice for the items with proof of excise paid, then the entire input tax credit can be availed, but such invoices aren’t actually available with most dealers.
The GST Council will next meet on June 11 to discuss account and record rules, and e-way bill rules. It will also address industry representations and any inconsistencies that might have cropped up in certain GST rates. The GST rate for lottery services will also be firmed up.
Jaitley indicated that new tax structure for footwear and biscuits would not lead to any increase in tax burden on the industry or consumers, as the rates are either the same or more benign. However, sections of the industry disagreed with the government’s estimate of the current tax incidence and felt the actual burden was lower.
Watch this also:
There is no rate shock either for the highly labour-intensive textiles and garments sector. Although many manufacturers of unprocessed fabrics (powerlooms) that are currently exempt will now come under the tax net (due to the lowering of the turnover threshold for taxation to Rs 20 lakh for GST from the present Rs 1.5 crore for excise duty and the imposition of 5% GST on grey fabrics), the seamless input tax credit (ITC) chain would soften the cumulative tax burden, industry analysts said. In the new system, for the textile value chain, full tax credit would be available but no overflow of credit would be permitted, Jaitley said. This means the ITC will be restricted to 12% even if the total taxes paid on raw materials are above 12%, sources said. However, readymade garments, especially those costing up to Rs 1,000 per piece, could become cheaper because the 5% GST rate is much lower than the current duty incidence, industry sources said.
Gold, silver and jewellery made of these metals will be taxed at 3% (as against ~2% now); chief economic adviser Arvind Subramanian had recommended a 4-6% rate for gold, saying a higher tax on gold will allow lower taxes of scores of other commodities. Currently, apart from 1% excise and 1% or slightly higher tax on sales by states, gold imports attract basic customs duty of 10%. BCD will remain in the GST regime, while the excise duty and VAT will be subsumed in it.
While the council had, in its meeting at Srinagar on May 18-19, decided on the rates of most goods and services, Saturday’s meeting successfully ironed out the differences among states over the rates on a few sensitive items. The council had earlier fixed the rates for some services, like restaurant services and renting of hotel rooms, on the basis of value-based thresholds; on Saturday, it proposed such differential treatment for footwear and garments. Analysts feared that items like biscuits could also come under differential taxation for the ostensible reason of minimising the regressive nature of GST, but that was not to be. Already, the GST rate structure has become much more complex than it should ideally be. A complicated structure is not favoured by most analysts, as it could allow rate arbitrage and frustrate the objective of eliminating cascading of taxes.
Footwear below Rs 500/pair will be taxed at 5% and those above Rs 500 at 18%; bidis will be taxed at 28% without cess. A GST of 18% will be levied on biscuits. A 5% tax will be levied on readymade garments with price below Rs 1,000 and 18% tax on costlier ones.
Solar panels and modules, revenue secretary Hasmukh Adhia clarified, will attract 5% GST, while these were earlier proposed to be taxed at 18%.
“Increase in deemed credit to 60% for products in GST slab of 18% and more comes as a major relief to the industry and neutralises the loss on transition stock to a large extent. Also, allowing 100% credit in case of high value items (above Rs 25,000) based on tracking of the product, even without actual excise duty paying document could be a major relief to sectors such as consumer electronics, durables and automobile. The disruption in the trade, therefore, would be minimised,” said Pratik Jain, partner and leader, indirect tax, at PwC.
Further, the council decided that on big-ticket items like motor vehicles and consumer products like electronics, which are usually identified by serial numbers, the industry will be able to avail the entire excise ITC irrespective of the invoice. These articles bearing such identification numbers establishes transactions and hence proof in the shape of invoice isn’t required, Adhia said.
Jaitley said the GST council will set up a committee comprising the Centre’s revenue department and some state government officials to look into complaints regarding anti-profiteering clause. While the Centre is firm that the benefit of low taxes in the GST regime must be passed by the industries to the consumers, the panel will “entertain complaints in this regard and recommend appropriate action.”
As per the decisions taken by the council on May 18 (when the GST rates for over 1200 items were fixed), about 7% of the items will fall under the exempt list while 14% have been put in the lowest tax bracket of 5%. Another 17% items are in the 12% tax bracket, 43% in 18% slab and only 19% goods fall in the top tax bracket of 28%. This would mean that more than four-fifths of the goods would fall under a GST rate of 18% or below, while currently, around 35% of items are being taxed at 27% or above, although the real tax incidence on them is 4-5 percentage points lower because the excise duty is levied on the ex-factory price.
According to PwC’s Jain, on rates, largely the principle of equivalence vis-a-vis current rates has been followed. However, he felt there was a disconnect between the calculations of current effective taxes done by the industry and the government, particularly on sectors like biscuits and footwear.
Somasundaram PR, managing director (India) at the World Gold Council said: “The government’s decision to apply 3% GST on gold is an encouraging step in the current context to stabilise the industry. (However), together with customs duty of 10%, the total tax on gold is still high and will continue to have an impact on the jewellery industry. This may be an opportune time for the government to cut the import duty … so that unauthorised imports are totally eliminated.”
Noted textiles expert DK Nair said while most of the GST rates for textiles and garments are at reasonable levels, the gap between the duty structures of cotton fibres (5%) and man-made fibres (18%) should have been bridged to address the age-old concerns of the industry.