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GST in a nutshell — all you wanted to know about India’s biggest tax reform yet

05 November, 2016

On Thursday, the government crossed a major hurdle as the Goods and Services Tax (GST) council finalised four slabs at which various goods will be taxed. But what exactly is GST, and how will it impact businesses and the common man? Here’s all you wanted to know about India’s biggest indirect tax reform yet.

What is GST and why is it important?

GST is essentially a single tax on the supply of goods and services, all the way from manufacturers to consumers. GST will be a tax only on value addition at each stage. The final consumer will be charged GST by the last dealer in the supply chain. GST is a consumption tax, and will be applicable at the stage where a product is consumed rather than at various stages of production.

GST will subsume almost all central and state taxes. At the central level, taxes such as central excise duty, additional excise duty, service tax, countervailing duty, and the special additional duty of customs will be subsumed. At the state level, state value added tax and sales tax, entertainment tax octroi and entry tax, purchase tax, luxury tax, and taxes on lottery, betting and gambling will be subsumed within GST.

GST is likely to help the economy and individual businesses in various ways. It will mean businesses will be able to file their taxes easily as all taxpayer services will be available to the taxpayers online. Further, GST will mean that indirect tax rates are common across the country, thereby ushering in a ‘one country-one tax’ regime. Minimising cascading effects will mean reduced hidden costs of doing business and a seamless process will ensure transaction costs are at the bare minimum.

What will be GST tax slabs?

On Thursday, the GST Council, which is headed by union finance minister Arun Jaitley and comprises his counterparts from the states, finalised four slabs—5%, 12%, 18% and 28%—at which various goods will be taxed. There is no clarity yet on what rates services will be taxed at, but most indications are that the rate will be 18% for most services.  

At least half the items that make up the consumer price basket, which determine retail inflation, will not attract any GST. These include foodgrains, wheat and rice. Other items of daily use are likely to be taxed at 5%. Items of a higher value will attract taxes at 12% or 18%, while demerit goods like tobacco, pan masala, luxury cars, etc will be taxed at 28%. Consumer durables like televisions, refrigerators, mobile phones etc too are likely to attract 28% tax. There is no clarity on what rate gold as bullion will be taxed, although the government had initially proposed a 4% rate. 

What will be cheaper and what will cost you more?

Although the new indirect tax regime will be revenue neutral for both the centre and the states, different tax slabs will mean that the prices of products across the board would change. The government has not officially announced the commodity-wise classification, which will determine the slab in which each commodity will fall, but information already available in the public domain helps us piece together a broad picture on what might become cheaper and what might pinch the common man’s pocket more. 

Figures compiled by consulting firm EY suggest that products like tea and jam, which are likely to attract GST at 5%, could become cheaper by up to 1%. Other commodities that could cost less include cornflakes and mobile phones, which may see their prices go down by up to 5%. 

While items like footwear could become dearer by 0.2%, others like bicycles and bathing soaps could see an uptick in their prices by up to 1.6%. Assorted items like pens and bottled water and white goods like LED TVs and split air conditioners could also become costlier (read this report to understand more on how GST rates will impact your pocket.

There is no word yet on the rate at which services will be taxed, but indications are that they will come under the 18% slab. This will make them dearer as most services are presently taxed at 15%. 

But why is there so much confusion on the tax structure?

Simply put, there is not much concrete information on the commodity classification. Although the broad contours have been outlined, the final classification of commodities has still not been made public. There is no clarity on which items in the consumer price basket, besides food items like wheat and rice, will not be taxed. We know that items like spices, mustard oil etc, used by the common man, will be taxed at the minimum of 5%; but again, we don’t know much beyond that. Processed foods are likely to be taxed at 12%, but there is no clarity yet on whether other goods will be put into this category or not. Items like smartphones, refrigerators, soaps, toothpaste etc will reportedly be taxed at 18%, despite the fact that that several among them are used by the common man. There is no clarity on whether items above a certain price threshold will be taxed higher than others. 

While it is clear that so-called demerit goods like tobacco and pan masala and items like aerated drinks will be taxed at 28%, with a cess on top of that, there is confusion on items like luxury cars. Experts say there is no clear definition of what exactly is a ‘luxury car’ for instance, and that could not only be open to interpretation going forward, but also significantly impact the fortunes of auto companies. Moreover, the cess on the demerit goods will be levied in such a manner that the tax incidence is not less than the existing rates, but the exact numbers have not been made public yet.

What will be the revenue compensation mechanism for states?

Since GST is a consumption tax, producer states will be at a disadvantage compared with consumer states. For this reason, a five-year compensation mechanism has been devised, as part of which the centre will collect a cess on demerit goods like tobacco and pan masala, over and above the GST. This cess is likely to yield about Rs 50,000 crore, which will then be distributed among these states. 

What are the sticking points?

One major stumbling block is about who—the centre or states—will assess individual entities. The GST Council this week could not come at a consensus on how the question of assessment should be worked out. One of the proposals on the table is that entities with an annual turnover of less than Rs 1.5 crore should be assessed by the states, while those with a turnover of more than Rs 1.5 crore should be divided among the centre and states. The states are not happy about this as they stand to lose the power of assessment. Another proposal is that there should be a vertical division of entities between the centre and states. The GST council is likely to meet again on 20 November and try and reach a consensus on this issue.

What will happen on the legislative front?

During the monsoon session of the parliament earlier this year, the government managed to pass the constitutional amendment that was necessary to implement the GST regime, after it received support from most of the major opposition parties, following months of negotiations. These amendments were later ratified by more than half of the states and signed into law by President Pranab Mukherjee. In the upcoming winter session of the parliament, the government will bring the second part of the legislation that will be required to implement the GST. Once this is passed, the rules for the same will be finalised. The role of the GST Council will be key when it comes to implementing the regime and sorting out differences between the centre and states. If it all goes according to the plan, the government is targeting rolling the new indirect tax regime out by 1 April.

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GST in a nutshell — all you wanted to know about India’s biggest tax reform yet

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