by CA Pritam Mahure | February 27, 2017
The government seems resolute to bring in the GST regime soon. With activity happening at a frantic pace, it might not be too long before the new tax regime kicks in. Apart from the various considerations that tax payers need to keep in mind, a very important aspect that concerns them is the rate at which GST will be levied. The discussions started in November 2016 Council meeting when rate slabs were identified and the recent council meeting held in February 2017 worked to finalise the Compensation Act which will enable Government to levy cess applicable in few tax slabs.
We will look into these slabs in detail, however, before delving into the GST rates, let us first understand the current rates of indirect taxes on goods and services.
Indirect Tax Rates
As the name suggests, indirect tax is not directly levied on consumers. Indirect taxes are often levied on goods and services and are indirectly collected from them as and when they buy goods or avail services. Indirect taxes therefore result in an increase in the price of goods and services.
A few examples of indirect tax include service tax, central excise and customs duty and value added tax (VAT).The different rates of taxes on goods and services in current tax regime areas below:
Table 1: Rates for Indirect Taxes in Current Tax Regime
GST Rates Schedule (Rates of Goods & Services Tax)
With GST replacing indirect taxes, it is good to know the likely GST rates. In the November 2016 GST council meeting, the Finance Minister came up with a 5-slab structure for likely GST rates:
Table 2: 5-Slab GST Rate Schedule
Looking at the proposed tax structure, it appears that though the Government has decided the rate slabs for various types of products/services, it is yet to come up with the item-wise GST rates.
Exemption to GST Rates
As regards exemptions, about 80 items are likely to be exempted under the proposed GST including green coconut, poha, unprocessed green tea leaves, and non-mineral water etc.
The current exemptions under the Centre and States are likely to be reduced and aligned. Currently, States exempt unprocessed goods and those consumed by the financially weak strata such as fruits, vegetables, salt, grain and coarse fabric. Centre, on the other hand, provides excise exemption to few essential pharmaceutical drugs (including immunisation vaccines) and a concessional rate to select food items. Common items exempted by the Centre and States include bread, eggs, milk, vegetables, cereals, books and salt. These may continue to be exempted.
Talking about services, currently approx. 70 services are exempted from the service tax which could be reduced to essential services such as health care, education etc.
GST Slab Structure
Let us take a look at the slab structure in detail.
In GST regime, Zero rate slab items will be different from exemption as Input Tax Credit (ITC) will be given in case an item is zero rated. Input tax credit is essentially the credit manufacturers or dealers would receive for paying input taxes towards inputs used in the manufacturing of products or while purchasing goods for resale. Thus, items drawing zero rates will still be in the GST chain while those exempted wont be.
It should be noted that export supplies and supplies to Special Economic Zone would attract zero rate. In one of the press releases, it was even suggested that the petroleum products will be zero rated (as they will continue to attract excise and VAT).
Lower rate of 5% for items of mass consumption will make goods and services pocket-friendly for the common man. What is further beneficial is that if the credits on procurement are fully available to these suppliers, then rates may go down further. However, there is a catch 22 situation which businesses might face as explained in the next section.
The next slab to concessional rates is that of standard rates defined under two different slabs of 12% and 18%. Most of the remaining goods and services might get itemised here.
What is worth noting is that the proposed cumulative rate of GST is much higher than the Revenue Neutral Rate suggested by the Thirteenth Finance Commission (TFC) at 5% CGST (Central Goods & Services Tax) and 7% SGST (State Goods & Services Tax) and the suggested 17-18% by the Chief Economic Advisor,Mr. Arvind Subramanian, to the Government.
While goods finding their way in this tax slab may not pinch much due to the largely unchanged tax rates from current indirect tax regime, few services may get dearer due to a push from the current 15% slab to the higher ones.
Taxpayers need to look forward to the list of items that will now be called luxury goods because what was considered luxury a few years back might have become a necessity now. Hence, it will be worth watching what the GST council brings into this tax slab.
Another aspect worth looking at is the levy of cess in the luxury tax slab. While tax burden wise, this will be acceptable to the industry as these goods face a similar tax burden currently, dealing with another tier of tax would cause concerns in administering. With so little time to prepare, putting such systems in place will be a challenge for both, the government and taxpayers.
All in all, the GST rate schedule sounds promising theoretically but much would depend on the actual tax slabs that items get categorized into.
As an anti-profiteering measure, GST law mandates that the reduction in the price of goods and services on account of any reduction in the tax rates should also actually result in a commensurate reduction in the prices of those goods and services. Hence, companies will now have to revisit the pricing of their products. Even procurements will get impacted in view of change in tax rates on various goods and services that companies procure.
The mandate to pass on the profits to end consumers will require companies to actually identify how much the rate reduction has benefitted the company to ensure that its passed on to consumer. Further, companies will also have to ensure that their vendors are sensitized about the aforesaid provisions and they pass on the benefit too.
Given the aforesaid ramifications, it can be stated that entire business ecosystem should gear up for the GST rate strike. While businesses need not comply today, this is the right time to proactively start gearing up for the inevitable to come.
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In the meanwhile, if you have any questions please write to Pritam@irisgst.com