GST rates: The enigma

The fourth round of meetings of Goods and Services Tax (GST) Council resulted in the most anticipated announcement on GST rates. The Council has effectively proposed a multi-layered tax rate structure on the premise that the GST rates should not vary significantly from the rates under the existing indirect tax enactments.  

The rate structure proposed by the Council consists of lower rates of five per cent on essential goods. Standard rate of 12 per cent and 18 per cent on most goods and services and higher rate of 28 per cent on goods that are currently subject to a tax of 30 to 31 per cent have been proposed.  While an additional levy of cess on luxury items and demerit goods has also been proposed, the modalities related to levy of such cess — point of taxation, credit eligibility, etc —has not been clarified. With the proposed rates, the intent of the government seems to keep the tax rates under GST at par with the existing rate scheme, ensuring that the tax incidence may not witness a considerable change for goods under GST.  

 

The above tax structure is clearly a backward step from the true GST structure. The multi-tax structure would pose many issues around taxability and classification of the goods and services, which were expected to reduce with the introduction of GST.  

While bringing down the rate of tax for goods which are currently taxable at about 30-31 per cent to 28 per cent, the government has factored in the effective rate that includes the cascading of taxes, whereas without cascading the current effective tax rate comes out between 25 and 27 per cent. Thus, the proposed rate of 28 per cent does not effectively reduce the tax burden on many goods; instead it carries the burden of cascading of tax even under GST regime.  

Further, with this proposal, a large part of the goods, which are currently taxable at standard rates, may move from the 18-per cent basket to the 28-per cent one, leaving doubts in the mind of the industry on goods which will fall under the 12 per cent and 18 per cent brackets. So, it becomes critical for industry to watch out for the list of commodities to be taxed at the highest slab of 28 per cent as commodities covered in this bracket are likely to face a higher tax incidence than those under the current regime.

Among all the proposals, the one to levy additional cess on luxury goods and sin goods is the greatest worry for industry. 

From the perspective of overall tax incidence, levy of cess on luxury items and demerit goods should be acceptable to industry as these goods face a similar tax burden at present.

However, dealing with an additional tier of tax in the nature of cess will create administrative difficulties in terms of levy, collection and monitoring of such cess. The rate of such cess is another critical piece of information, which is yet to be clarified by the Council. Also, it is likely that different range of cess could be prescribed depending on the nature of the product.

Additionally, the levy of cess would lead to cascading of taxes, unless the credit of cess is allowed against the levy of GST, which in turn leads to a flawed GST system in stark contrast to the expectation of industry. 

Another issue that has raised an alarm is the classification of luxury goods. Up till now, the de-merit rate of tax was talked only in the context of luxury cars, tobacco, aerated drinks, etc. However, the latest announcement has made it clear that the objective of the government is to target the larger set of high-end products/luxury products. Industry would now be keen to know the criteria to be applied by the government to notify goods as luxury goods.
 

The levy of cess under GST will have inherent tax inefficiencies to start with and to that extent, the expectation of driving efficiencies in tax framework and steering the momentum of economic growth in the country may not be completely met.  

The proposal to tax essential items at a lower rate is a welcome pronouncement, which will allay the fears of the common man that GST will have an inflationary impact on items of daily usage. Another noteworthy proposal is to zero-rate foodgrains together with 50 per cent of items of the Consumer Price Index basket. These announcements are populist in so far as the message to tax the bigger fish has been conveyed through them. 
 

The real impact of the rate structure across all sectors and products can be ascertained only when complete schedules are available. The government should expedite the release of the GST schedules to enable businesses to drive changes in their business processes to become GST-compliant from the day it goes live.
 

It is the need of the hour for the GST Council to assuage the uncertainties and qualms of taxpayers so that informed decisions can be taken for re-aligning business practices in consonance with the GST regime. Further, to achieve a near-perfect GST system, the multi-tiered rate structure should ultimately converge into a single or double rate structure in line with the globally followed practices in the years to come.  

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The author is leader, indirect tax at BMR & Associates LLP. With inputs from Anshul Aggarwal, director and Netal M, assistant manager at MR & Associates LLP