After the much created hype of a 'uniform tax structure' or a 'one nation, one tax' regime the Goods and Services Tax council on Thursday, finalized a four-tier tax rate structure. The slab includes rates of 5 percent, 12 percent, 18 percent and 28 percent. This proposed rate structure was given a warm welcome by the industry experts. It is because given the geographic and economic complexity of a vast country like India, arriving at the uniform tax rate would have been more complicated and consumed more time. Another reason being that it closed apprehension that a single GST tax rate would be highly inflationary.
As per the rate structure agreed upon by the council on Thursday, a zero tax rate will apply to 50% of the items present in the consumer price index basket, including food grains such as rice and wheat. This was done to minimize the inflationary impact on the common man while protecting revenues. This also partly addresses the big worry of the RBI that the GST rollout will erase the hard-won gains on CPI inflation over the last 2-3 years.
As per the rate structure agreed upon by the council on Thursday, a five percent tax rate will apply to items of mass consumption like spices, tea and mustard oil will be taxed. It will definitely make the 'aam aadmi' grocery bills petty.
The 12% and 18% will form the backbone of the GST collection system. It will accommodate most of the goods and services. The 12% will contain the few essential goods and services wherein the majority of the goods and services will be constituting the 18% tax slab. Some fast moving consumer goods like toothpaste, soaps, processed food etc. will constitute this bracket.
The highest bracket consists of tax slab of 28%. It will constitute the 'white goods' like washing machine, clothes drier, cars and 'luxury goods' like high end watches, cars and 'sin goods' like pan masala, tobacco etc.
The demerits and sin goods will be charged cess over the 28% tax slab. The cess will be charged in such a manner that the final tax on such goods is not less than the existing tax rates. The rationale for a cess on these item is twofold: to pay for the damage caused to society by products like tobacco, and to increase the price and reduce their usage.
It will be charged for first five years.
It will help to generate revenue, which will be used to compensate states for losses arising from GST i.e. 50,000 crores in first year.
Although the GST Council has been able to finalize a four-tier tax structure but there are still some key tax strategies to be implemented that will determine the future of GST.
After finalizing the tax slabs, the most crucial challenge for the GST Council is to decide which product should fall under which category. As of now, there is considerable uncertainty on what kind of changes will come in the tax rates of specific goods and services.
This will in true sense determine the success of GST, as division of products and services under the tax slabs will be a cumbersome practice.
The GST promised a dual control i.e. the distribution of businesses between Center and State for tax assessment and audit. Although the proposal for GST was happily embraced by most of the States, but getting a political consensus is a big task. Hopefully the informal meeting scheduled between the Centre and state finance ministers on November 20, brings good news for all!!
The preparation of the drafts of the Central GST, State GST, Inter-state GST, and Compensation Law are expected to be completed by November 14-15. The Sates will have one-week time to review the draft and respond with any recommendations.
With high hopes to roll out GST in April 2017, industries and business will have to manage the transition in 3 to 4 months. Usually in countries where GST has been implemented, a grace period of one year is given to prepare for the transition.
The tax bracket for Gold is yet to be finalized.
The additional cess rate on 28% tax slab needs to be uniform. If not, then it will dilute the whole purpose of GST. Therefore, setting a uniform cess rate will a major challenge.