A weighing scale for groceries. (Source: Wikimedia Commons)

Equity In Four GST Rates Versus Equality In One Rate


The 14th GST Council meeting conducted on May 18-19, 2017, has been monumental for two major reasons, one being the finalisation of Goods and Services Tax (GST) rates and GST rules; and the other being the political significance of Jammu & Kashmir hosting the council meet and providing an in-principle approval to become a part of the GST regime along with other states.

Over the course of two days, the GST Council released a set of final GST rates for various goods and services. The council bifurcated goods and services into four major tax slabs - 5 percent, 12 percent, 18 percent, and 28 percent along with an exemption list of goods and services on which tax may not be levied under the GST regime. In addition, a compensation cess for a select a few goods like pan masala, cigarettes, soft drinks, motor vehicles, motorcycles, etc. has also been proposed. With more than one tax rate, one may ask how multiple tax rates under GST are different from the multiple tax rates under the current indirect tax regime.

The Idea Of Equity In Taxes

Many countries have, in the past, adopted the GST regime as their indirect taxes system. Traditionally, adopting a single GST rate for all the categories goods and services is considered an ideal method of implementing GST in any country. However, moving away from the norm, a few countries like Canada and countries in Europe have chosen to adopt multiple GST rates instead of just one. When GST was first proposed in India, it was speculated that India too would have a single tax GST regime. In order to ascertain the rate of tax for GST, governments over the years commissioned various study reports like ‘Estimation Of Revenue Neutral Rate’ by National Institute of Public Finance and Policy (NIPFP); and the Task Force Report (2009) for estimating the Revenue Neutral Rate (RNR). Through these reports, it was observed that adopting a single rate structure for GST could be extremely challenging within the precincts of the Indian tax structure, as the median RNR GST in one of the studies was reported to be as high as 27 percent.

In a nutshell, if a one rate GST structure were to be adopted in India – let’s say at 20 percent - the tax would be levied at 20 percent on both necessity goods (like milk, food grains, bread) and luxury goods (luxury cars, high-end mobile phones).

Accordingly, it was judged that a single GST rate structure in India would have made an apt case for ‘equality’ in taxes, but would have failed on the grounds of ‘equity’.

Thus, given the diverse nature of commerce and consumption in India, a four rate structure was adopted to ensure that there is only a marginal change in tax rates and prices in the GST regime, as compared to the current regime. By doing so, the Council has ensured against putting an inflationary pressure on the prices of goods which are in the lower tax bracket under the current tax regime.

Rationale For Allocation Rates For Goods

The rationale for ascertaining the GST rate of various categories of goods stems its roots from the current regime (VAT, excise). For a majority of the products, the GST rate has been pegged at or around the effective rate of tax levied on the product under the current regime. The trends observed in the GST rates for goods are:

Favourable Allocation

  • A majority of the tax exemptions under the current regime have been grandfathered in the GST regime, and accordingly food items, fresh vegetables, fresh milk, salt, printed books, etc. will continue to be exempt under GST as well.
  • Ayurvedic/Unani medicines which are currently taxed at around 12 percent will continue to be taxed under 12 percent category under GST.
  • Household articles which are charged at around 18.5 percent under the current regime will be levied at 5 percent under GST.
  • Tax on tea/coffee has been reduced to 5 percent under GST, compared to the current rate of 6 percent.
  • Tax on coal has been reduced to 5 percent, compared to 11.7 percent under the current regime.
  • Tax on most agriculture-related products has been slashed down as compared to the current regime.
  • Tax on the luxury car segment has been reduced from around 52-55 percent to 43 percent (inclusive of the compensation levy) under GST.

Unfavourable Allocation

  • Tax on the manufacture of cell phones has been increased from 6 percent under the current regime to 18 percent under GST.
  • Tax on plastic products has been increased from 18.5 percent under the current regime to 28 percent under GST.
  • Tax on personal hygiene items has been increased from 26 percent under the current regime to 28 percent under GST.
  • 28 percent rate has been proposed for motor vehicles under GST. However, an additional compensation cess of 1 percent and 3 percent will also be levied - depending upon the variant of the small car (i.e. petrol or diesel). The cumulative tax incidence on motor vehicles under the GST regime shall be marginally higher than the current tax regime.

The Idea Of Equity For Taxing Services

Unlike the tax on goods, services in India were always centrally levied at a single rate of at 15 percent. Surprisingly, under the new GST regime, the government has done away with the single rate of taxation for services. Abiding by the sense of ‘equity’, the GST Council has pegged a higher rate of taxes (28 percent) for luxury services like gambling, betting, hotel services (above Rs 5,000) etc. and kept general services like transportation in the lower tax bracket of 5 percent.

Barring specifically identified services with variable tax rates, all the other services, if not exempt, have been put under the 18 percent slab as a standard rate.

Although industry players expected that a few services like financial services, telecom services, insurance services etc. might be considered for the lower tax bracket, the Council as of now has decided to keep these services under the standard 18 percent as well.

At first, it may appear that there is a direct increase in tax rates from 15 percent at present to 18 percent under the GST, which could have an inflationary pressure on services. However, it is to be noted that under the GST regime service providers will get full credit for taxes paid on goods on the input side, which shall effectively bridge the overall rate gap for service providers.

GST Rate For The Final Six Products

Apart from list of goods for which tax rates have already been released by the GST Council, there are six other items - tendu patta (bidis), biscuits, textile, footwear, jewellery and agricultural machinery for which the rates are yet to be announced. The rates for these goods will only be finalised in the next GST Council meet which is scheduled on June 3. It is speculated that there could be a new rate category (like 4 percent) which could be announced for jewellery, however, there is no confirmation on this.

With this, there is certainty that July 1, 2017, is the implementation date, as has been spelt out by the government. It is the last mile which the industry has to run to effectively implement and transition into the new regime.

Jigar Doshi is an indirect tax partner and Ravi Soni is an executive at SKP Business Consulting LLP. The views are personal in nature.

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