Tracking GST: Tax Rate Structure Too Complex

The Goods and Services Tax (GST) Council, comprising the Union finance minister, the minister of state in charge of revenue and the state finance ministers, has fixed a four-tier rate structure for the reform that many believe to be the biggest in India since the watershed economic liberalisation of 1991.

The four bands of tax rates have been fixed at five per cent, 12 per cent, 18 per cent and 28 per cent. Beyond this, in order to compensate states for their loss of revenue due to a host of state and Central level taxes being subsumed by GST, luxury cars, aerated drinks and tobacco, will be levied an additional cess over and above the highest tax rate.

This cess, which is intended to supplant a potential loss of about Rs 50,000 crore, will lapse after a period of five years. In the event there is any excess left over, the same will be shared between the Centre and the states.

White And Sin Goods
In a move appreciated widely, foodgrain will be zero rated to insulate people against inflationary pressures. Common use items of mass consumption will be charged at the rate of five per cent and the standard rates of 12 per cent and 18 per cent will accommodate most of the goods and services. White goods will be taxed at 28 per cent (for the most part, with riders — to accommodate goods being used by the lower middle class).

Demerit goods or sin goods such as luxury cars, pan masala, aerated drinks, and tobacco and tobacco products, will invite a tax of 28 per cent plus cess. Accordingly, the overall incidence of cess, could vary between 40 per cent and 65 per cent. There has been no consensus on the tax rate for gold, as yet, with finance minister Arun Jaitley putting on hold the Centre’s initial proposal to charge 4 per cent GST.

Overly Complex
We feel that the multi-tier tax system, coupled with multiple registrations in each state for supply of goods and services makes this procedure overly complex. Reform at this stage should have resulted in one or possibly two rates / slabs to ensure simplicity. As the multi-tiered rate structure is still in a very nascent stage and it is as yet not known what items will fall in each tax bracket, it is too early to comment on whether or not the new rate structure will lead to inflation.

We are of the view that the powers that be should ensure that the majority of manufactured products be kept in the 18 per cent slab and not be pushed into the more cumbersome 28 per cent slab.

Defining Luxury
The GST Council ought to consider present usage trends, along with past historical data, leading up to the current market scenario while determining which products fall in which slab; as items viewed as luxuries a few years ago have fast become a way of life and necessities in today’s day and age.

The GST Council has so far only fixed slab rates for goods. A decision is yet to be taken in terms of services. The current sentiment in the market is a need/demand for a single rate structure applicable to services.

All in all, it is a reform which tries to simplify tax structure and eliminate multi-level tax incidences and burdens in the name of unity and simplicity, but only ends up delivering a confusing tax structure.