A cigarette vendor sets up his shop in a market in New Delhi (Photographer: Sanjit Das/Bloomberg News)

GST Rate Structure: One Step Forward, Two Steps Back?

The much-awaited Goods and Services Tax (GST) rate structure is out. The GST Council has fixed a four-tier tax structure at 5 percent, 12 percent, 18 percent and 28 percent, Finance Minister Arun Jaitley said in a press conference on Thursday. Essential commodities which include 50 percent of the goods in the current consumer price index (CPI) basket, will be taxed at zero percent under GST.

Demerit goods such as tobacco, aerated drinks, pan masala, and luxury cars will be taxed at 28 percent with an additional cess. The cess on these items, along with the clean energy cess, will be used to compensate states for loss of revenue during the first five years under the GST regime.

In announcing a GST structure that comes with multiple tax slabs and cess, has the government taken one step forward and two steps back?

Uday Pimprikar, partner of indirect tax at EY told BloombergQuint in an interview that he agreed with India’s Chief Economic Advisor Arvind Subramanian’s assessment that this GST structure will be more than revenue neutral.

I think the rate structure is getting proffered on account of the anxiety that the central and state governments feel today. The assessment that this will end up being more positive than neutral, from a revenue point of view, is right. The way they have defined the compliance regime, it is bound to increase under GST and therefore the rates recommended by Arvind Subramanian in his report were slightly muted. A 28 percent rate is a very high rate.  
Uday Pimprikar, Partner – Indirect Tax, Ernst & Young

Uday added that the 28 percent rate regime will come with its own set of issues. A 28 percent tax at the retail level will only highten the incentive to evade will be much higher, he explained.

If soaps are at 28 percent and the retailer’s margin is, let’s say, is 10 percent, if he is below the threshold limit and doesn’t want to register and pay tax, even as a composition levy, his margin related to the maximum retail price increases by that much. On the other hand, a player in the organised sector above the threshold will have to register - one would need to be sensitive to the kind of distortion this can cause. Industry should watch out for the distortionary impact of two kinds of suppliers – one in the organised sector who are above the threshold limit and the other who are in the unorganised sector and below the threshold limit.
Uday Pimprikar, Partner – Indirect Tax, Ernst & Young

GST Classification

On the classification of goods under various tax slabs, Ved said the government will get tempted to put luxury goods and goods that come from the organised sector under the 28 percent bracket. An essential product or service like education and healthcare, regardless of whether it’s coming from the organised or unorganised sector, have to be taxed at a lower or zero rate as taxes on these will be regressive, he added.

Services may get taxed at anywhere between 15-18 percent, Ved said.

I will be extremely surprised if services are taxed at any rate higher than 18 percent. One needs to look at how the taxation regime for services has moved. In a span of three years, the tax imposed on services has increased by 80 percent. You can’t stretch it beyond that. It would be interesting to watch if some services get taxed at a lower rate of 12 percent. 
Uday Pimprikar, Partner – Indirect Tax, Ernst & Young

Cess Makes A Comeback

While talking about the imposition of a cess on demerit goods, Ved said that industry will look at how these cesses will be applied, and if they have a cascading effect.

Industry will also await clarity on the credit mechanism for cesses, he added.