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Why there is more confusion than clarity on the GST rate structure

04 November, 2016

The Centre and states have crossed a major hurdle for the implementation of the Goods and Services Tax (GST) after a panel headed by union finance minister Arun Jaitley finalised most tax rates for goods. 

Although the broad contours have been outlined, the final classification of commodities has still not been made public. Here’s all that you want to know about what we still don’t know about the GST.

1. What will not be taxed: Although the government said on Thursday that there will be four main tax slabs of 5%, 12%, 18% and 28%, effectively, there will also be a fifth—0%. Almost half the basket of goods that make up the consumer price basket will not be taxed. We do know that this includes food grains including rice and wheat, but little more. The consumer price index basket is crucial as it determines retail inflation, and besides food, includes non-food items like housing, footwear, clothing and bedding. There is no clarity on which of these items will not be taxed.

2. Tax rate for gold: Earlier, the government had proposed that gold be taxed at 4%, but the GST Council did not take any call on this during its meeting on Thursday. The panel is slated to meet again today for a decision.

3. Items to be taxed at 5%, 12% and 18%: We know that items like spices and mustard oil, used by the common man, will be taxed at 5%. But we know little more. 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. Smartphones, refrigerators, soaps and toothpaste will reportedly be taxed at 18%, even though several of these are used by the common man. There is no clarity on whether items above a certain price threshold will be taxed higher than others. Moreover, tax rates on services have not been finalised yet, although most are likely to fall in the 12% or 18% slabs. 

4. Items to be taxed at 28% or higher: While so-called demerit goods such as 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’. That could not only be open to interpretation but also significantly impact the fortunes of auto companies. Moreover, the cess on 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.

5. Revenue compensation to states: The Centre will collect the cess on demerit goods, and use the proceeds to compensate those producing states that are likely to see a revenue shortfall following the implementation of the GST. Jaitley said that the collections during the first year are likely to be around Rs 50,000 crore. Having said that, there is no clarity on who will keep this money if the revenue shortfall is significantly less than this amount. Also, in such a case, will the cess continue for the entire duration of five years? Several experts feel that the cess could become just another way for the Centre to collect taxes and shore up its revenue.

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Why there is more confusion than clarity on the GST rate structure

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