Compensation Cess A Step Backward From True GST Structure: Rajeev Dimri
A cess will lead to difficulties that the GST tax structure could’ve avoided
The Goods and Services tax Council today announced a four-tier tax rate structure for the GST bill. The tax rates were finalised at 5 percent, 12 percent, 18 percent and 28 percent.
Read More: GST Council Finalises Four-Tier Tax Structure
Luxury items like big cars and sin goods like tobacco and aerated beverages have been placed under the 28 percent tax bracket, and most will attract an additional cess that will be used to compensate the states for their revenue loss.
The cess however, would lead to difficulties that the tax rate structure could've avoided, says Rajeev Dimri of BMR & Associates LLP.
Levy of Compensation Cess on certain luxury and sin goods in addition to tax takes GST a step backward from a true GST structure. Though proposed for initial five years, this would transit the complexities of existing tax regime to GST which could have been easily avoided.Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP
But as these products already face a similar tax burden under the existing structure, the industry will accept it despite administrative difficulties says Dimri.
From the perspective of overall tax incidence, levy of cess on luxury items and demerit goods should be acceptable to the industry as these goods face a similar tax burden presently. However, dealing with another tier of tax would be administratively difficult to handle, specifically given the short time frame that India Inc. has in hand for setting up GST enabled systems. Also modalities around levy of cess, viz point of levy, credit eligibility etc will be critical aspects to watch out.Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP
The list of commodities in the 28 percent slab are likely to face a higher impact of taxation than they do currently.
28 percent tax slab on items presently facing 30 to 31 percent tax (including Excise and VAT) would need to be watched out for categories getting fitted in there. This might increase the tax burden for certain items since GST would create a higher tax incidence as it applies on final stage in comparison to excise duty which applies at intermediate stage of manufacturing.Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP
The finance minister announced a standard tax rate of either 12 percent and 18 percent but did not clarify as to what the rate structure would be for services. Dimri expects services to be pushed into the 18 percent standard tax slab.
Standard rate of 12 and 18 percent for most of the items and services keeps the overall tax incidence below or around the existing tax costs. The inflationary impact on standard rated commodities should be minimal but services may become dearer by getting pushed to 18 percent slab.Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP
While Dimri welcomes the zero rate for more than 50 percent of the goods in the consumer price index basket, he does not see any significant reduction on tax costs for customers if the rate is limited just to food grains or agricultural products.
The five percent rate for mass consumption items, however, would make GST "less regressive and pocket friendly" for common people, Dimri adds.
Much to the rejoice of the consumer and industry, tax costs might even go down for commodities to be taxed at 5 percent provided the credits on procurement are fully allowed. While the lists are yet to be rolled out by the GST Council, all essential commodities and services, including education and health care should feature in the list of special concessional rate of 5 percent (if not zero rated).Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP