Businesses will acquire the ability to cut prices without taking a hit on their bottom lines, as either lower tax rates (in a minority of cases) or enhanced input tax credit or a combination of both will reduce their tax costs and help boost sales volumes.
Prices of a vast majority of everyday-use and mass consumption items, as well as that of scores of industrial inputs and capital goods, could potentially reduce significantly, giving a big push to both consumption and investment demand in the economy, as the country embraces the goods and services tax (GST) shortly. Businesses will acquire the ability to cut prices without taking a hit on their bottom lines, as either lower tax rates (in a minority of cases) or enhanced input tax credit or a combination of both will reduce their tax costs and help boost sales volumes. More than four-fifths of the goods would fall under a GST rate of 18% or below, finance minister Arun Jaitley said here after a crucial GST Council meeting, which endorsed the rate fitment for “1,211 items barring six categories”, the bulk of the GST goods universe.
Currently, around 35% of items are being taxed at 27% (12.5% excise + 14.5% state VAT), although the real tax incidence on them is 4-5 percentage points lower because the excise duty is virtually levied on the ex-factory price, given the abatement for post-manufacturing value addition. “There will be no increase (in the tax incidence) on any commodities. In many cases, there is a reduction (in rates),” the minister said. The principle of aligning the current rates to the GST slab closer to them has itself allowed more rate reductions than increases. This apart, Jaitley said, “we have consciously brought down the rates” for many items.
On the first day of its crucial two-day meeting here on rate fitment, the GST Council decided to tax food grains, mithai (sweets) and milk at zero per cent, as against 5% now; sugar, tea, non-instant coffee and edible oil and life-saving drugs will be taxed at 5% around the same level as now; several fast-moving consumer goods including toilet soaps, tooth paste and hair oil will come under 18% tax, compared with current 22-24% (nominal rate 29%); air conditioners and refrigerators will attract 28% tax (29% nominal rate now, real incidence 2-3 percentage points lower); a slew of industrial intermediates and capital goods will attract GST at 18%, at least 4 percentage points lower than now.
The tax on coal will reduce from around 12% (plus Rs 400/tonne clean energy cess) now to 5% (plus the cess), in what could reduce power tariffs for households and industries. Source told FE that on top of the peak rate of 28%, small cars will attract a 1% cess and mid-sized cars, 3%. Apart from 28% GST, luxury cars will attract the cess at the ceiling rate of 15%. However, the council, sources said, did not take a final call on the rates for bidi, cigarette, textiles, agricultural implements, footwear, non-processed food and gold. These and the rates for services will be discussed on Friday. If the rates for any goods or services are not finalised on Friday, the council would meet again shortly, Jaitley said.
Revenue secretary Hasmukh Adhia said: “About 7% of the items 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%.” Tax experts, however, expressed concerns over a larger number of items than considered earlier coming under the 28% slab. Bipin Sapra, Tax Partner, EY India, said, “The broad rate structure of GST has become clear with very few items being exempted, most of them being in the 18% category and a large chunk under the 28% category. Accordingly, while food stuff and unprocessed basic items like tea, coffee and edible oil may become cheaper, a large number of items which will be under 28% bracket would become costlier.”
There were two basic questions before the council: a) Whether to tax items items with a combined tax incidence of 5-6% (which include over 250 excise-exempt items that attract VAT at 5-6%) at 12%; b) Whether to bring 35% of items that have a combined tax incidence of at least 27% under 18% bracket. It seems that it decided not to increase the rate for the former list of items while it hasn’t brought down the rate for all items now being taxed at 27% or higher. Jaitley said there will be no inflationary impact as most of the rates which are at 31% ot above have been brought down to 28%. Although the tax incidence will come down for the CPI basket and other items, evasion would be plugged and buoyancy would improve, he added. The council also cleared seven out of the nine GST Rules it was considering; the rules on transition and returns are yet to be endorsed by it.
Welcoming the council’s decisions, Pratik Jain, partner and leader–indirect tax, PwC, said: The only concern is that 19% items (over 200) would be kept under 28%, which was initially meant for only few commodities such as luxury cars, aerated beverages etc. One would hope that government would continue to make efforts to bring the rates down on most of these products as we go along.” FE has recently reported that among the 120 services that are currently being taxed, a vast majority is likely to come under the GST slab of 18%, while a clutch of them including air travel services, renting of hotels, restaurants and other “bundled” food supply services could get taxed at 12%. A handful of services including transport of goods by road (trucks) and rail and financial leasing including hire purchase could fall under the lowest GST rate of 5%.