A Common Man-Friendly GST Rate Structure

The Finance Minister, as the Chairman of the GST Council, today announced the GST rate structure agreed among all the GST Council members. The GST rates broadly fall under 4 slabs covering 5 percent, 12 percent, 18 percent and 28 percent.

Read: GST Council Finalises Four-Tier Tax Structure

The Finance Minister confirmed that for the purpose of compensating the loss in tax revenue of the states, cess would be imposed and distributed. There seems to have been consensus on the imposition of cess, instead of having a higher tax slab. While the Finance Minister left it to the individual Revenue Secretaries to work together to distribute the goods and services among these tax slabs, the broad implications from the meeting can be discerned.

Common Man-Friendly

The Finance Minister stated that 50 percent of the items comprising the CPI (consumer price inflation index) basket would be zero rated. This means that there will be no incidence of tax on the supply of such goods. Interestingly, the Finance Minister seems to suggest that for such goods, any input taxes paid on inward supplies would be refunded. This is a departure from the current practice and will aid in the reduction of the price of such goods even further. The details will need to be seen but this can be gathered from his press briefing.

Balancing Rates

Some states were of the view that imposition of a 6 percent tax on some of essential goods would lead to higher incidence of tax on the common man and consequently lead to inflation. Some states wanted a rate of 2-4 percent on such goods, with the loss of revenue from such reduction being balanced by taxing luxuries at a higher rate. The GST Council seems to have reached an equilibrium by reducing the rate on such goods from 6 percent to 5 percent and increasing the rate of tax on demerit goods from 26 percent to 28 percent. This is certainly a more common man friendly measure. In many cases, this rate of 5 percent is likely to be lower than taxes levied under the current regime.

Services More Expensive

It is reported that the Revenue Secretary has indicated that the rate of tax on services is likely to be 18 percent uniformly. It definitely makes services more expensive but also provides room for more input tax credit on inward supplies of goods. This is likely to affect different services differently, but the broad sense is that services will be more expensive than today.

CESS: Whether Creditable

Cess has been an area of concern for the industry as it creates unnecessary uncertainty. Several industry associations represented that cess should not be levied. However, cess is here to stay. Importantly, it is likely to vary from year to year, depending upon the amount of extra taxes that need to be collected to compensate the States. The rate of cess is also likely to be high. One issue is whether the cess would be creditable. If the cess is likely to be imposed only on certain goods such as aerated drinks, pan masala, luxury cars and tobacco products, it may be necessary to provide credit of such cess. This is because these goods are not industrial inputs but are likely to be sold to consumers through a distribution network. The final details would be known once the law comes out.

Gold: No Clarity

There is no clarity whether there will be a separate rate for gold and other precious metals. This will be known once the final law comes out.

FMCG Sector

The goods of the FMCG (fast moving consumer goods) sector are likely to be in the 12 to 18 percent bracket, which will be a significant benefit for the sector. With supply chain optimization, we can expect a reduction in the price of the goods of this sector.

Conclusion

The GST rates are designed to be as common man friendly as possible. The issues, however, are likely to be faced at the other end of the tax slabs where there is likelihood of several disputes on classification, rates, exemptions, etc. The general sense also is that having a multi slab tax rate is likely to lead to some level of litigation.

There are many details yet that still need discussion. For example, how will the rates be split between the Central GST and the State GST. What will be the rate of IGST (Inter-state GST)? Will the states be given flexibility to vary some GST rates? These are questions that will be answered in due course.

For the time being the step of agreeing to the rates is a huge step towards achieving the target date of April 1, 2017 for the roll out of GST.

L Badri Narayanan is a lawyer and partner with well known law firm Lakshmikumaran & Sridharan. He specialises in advising technology companies on corporate, commercial, intellectual property and tax laws.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.