GST Rates-A Balancing Act 

The GST Council has evolved a consensus on GST rates for goods and services, leading us closer to the 1 July implementation. This is indeed commendable and demonstrates the efficacy of this new federal policy body, which bodes for a good future.

The underlying objective of this rate fitment has been clear for some time, which is to maintain the current effective indirect tax burden (Center and State taxes together) within the agreed multiple rate structure, to control inflation and avoid surprises. The focus has also been to see how best items of mass consumption can be kept at an optimum rate, and to ensure social equity. While this exercise has been successful in most cases where goods are concerned, there are some outliers even in the case of mass consumption items like detergents, paints, etc. where there has been a rate increase.

Essential goods have been kept at either nil or at 5% to control inflation in the mass consumption basket, besides goods like coal at 5%, which will benefit thermal power, steel industry and other coal-consuming sectors. Capital goods by and large are at 18%, which is welcome considering the capex cycle that is likely to happen in the next few years.

At the outset many believed the 28% rate would have a smaller set of goods, but, as the dialogue proceeded, it became evident that several goods which currently attract 22-25% could also potentially fall in this bracket, and that is what has happened. Consumer durables and electronics, small and large, fall in this bracket, though many of these products in today’s context are of significant consumption. Also, some goods at rates of 12%, like tractors, may end up with an inverted duty structure with inputs at higher rates, leading to refunds. As long as such refunds are addressed in a timely manner, the issue can be somewhat cushioned.

Mobiles will be at 12%, versus the current concessions, so it remains to be seen how domestic manufacture will progress, going forward. Small cars and motorcycles, as expected, are at 28%, but the cess element in such cars was news. Equally, the treatment of hybrid cars at 28% plus cess of 15%, came as a surprise, considering the fact that a push for such vehicles is good from the environment perspective.

While this multiple rate structure may be pragmatic at this stage, the endeavor should be to gradually move to a two rate structure within the next few years, once increased compliance and transparency produce revenue buoyancy and instil confidence.

Services fitment was along similar lines, so we have ended up with a less-than-ideal multiple rate structure, with more rates than the current service tax. Here again, rate fitment has seen the socio-equity objective, with entertainment, luxury hotels and high- end restaurants at 28%, while transportation – rail, road and air (economy) are at lower rates of 5%, with specified input credits. Also, current exemptions have been maintained, with healthcare and education outside the purview. Telecom and financial services are at a default rate of 18%: whether these sectors can cushion the increase with efficient credit chain is debatable.

The transition credit rules and rates for critical goods, especially the presumptive credit for excise beyond the document chain, are critical, as they will determine how the distribution chain will behave vis a vis stocking/ de-stocking of goods in the run up to GST. While the law-making, rates and rules are finally falling into place, one area which is equally important is the readiness of the GSTN, which is critical for compliance reporting.

It’s time now for all stakeholders to brace up for 1 July, and hope the transition is manageable, with limited disruptions.

 

 

Source: CII Communique June 2017

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