The Centre and the states have managed to hammer out a broad consensus on the contentious issue of fixing tax rates under the proposed goods and services tax (GST) regime, marking a significant step forward in the rollout of the new tax regime by early next fiscal. On Thursday, a four-tier GST rate structure of 5 per cent, 12 per cent, 18 per cent and 28 per cent was approved by the GST Council.
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Chaired by Union Finance Minister Arun Jaitley, the Council met in New Delhi for the fourth time to thrash out vexed issues of rates and dual control, wherein it was decided to fix 5 per cent duty on mass consumption items and a 28 per cent rate on items such as packaged consumer goods. This is a departure from the Centre’s earlier proposal of a 6 per cent floor rate and 26 per cent peak rate.
Briefing reporters after the meeting, Jaitley said all GST decisions were made by consensus, except on fixing the 28 per cent rate slab for which “Kerala FM had an alternative view”. Though some states such as Kerala wanted a 40 per cent tax on demerit goods, members of the GST Council finally decided in favour of fixing a higher rate of 28 per cent and levying a cess on the differential between the 28 per cent rate and current tax incidence for demerit and luxury goods.
About 50 per cent of items in the Consumer Price Index (CPI) basket, along with food grains, will be exempted from the proposed GST while white goods and goods with effective tax rate of 30-31 per cent but being used by lower middle class, will be in the lower tax slab. “We have been able to finalise the rate structure today and the rate structure would be the following: that there will be a zero tax rate in which several items, which approximately constitute 50 per cent of the CPI basket, would be included. We won’t call it the exempted item.
We would call it zero-rate item and it was decided that food grains used by common people would be in this category. It would be zero-rated so that its impact in terms of inflationary pressure on common people is the least,” Jaitley said.
“The second category was decided at 5 per cent. The draft proposal had said 6 per cent and then we converged… and these are all decisions by complete consensus. We decided that it will be a 5 per cent duty on items of mass consumption which are used particularly by common people.”
He said though there were some objections for raising the tax rate to 28 per cent from 26 per cent, especially for items currently with a tax incidence of over 27 per cent (excise of 12.5 per cent and 14.5 per cent VAT), the additional revenue generated will be used to bring items used by the middle class into the 18 per cent category from 28 per cent currently, and from 6 per cent to 5 per cent.
“The cascading effect took the rate to between 30-31 per cent for most of these items… there was a suggestion to bring it down to 26 per cent but finally the consensus is that these items, with cascading effect of 30-31 per cent, will now be taxed at 28 per cent, with a rider. And the rider is that in this category, there are several items that are now being used increasingly by a very large number of people, particularly the lower middle class people.”
“So one of the objections behind raising 26 to 28 per cent is that the tax will be still below the present rate but the additional revenue we get will be used for keeping the 5 per cent items, keeping food grains exempted and, thirdly, transferring a number of items from this 28 per cent category to the 18 per cent category. Particularly those items which are now used by lower middle class. So for them, 28 or a 30 or 31 rate will be higher. We are transferring them to this (18 per cent),” Jaitley said. He cited example of goods such as soap, oil, shaving sticks that will be included in the lower tax slab than 28 per cent.
The Council did not take a decision on the tax rate for gold. Jaitley said it will be decided later, depending on the fitment of items in the different rate slabs and revenue flexibility available with the government. Jammu & Kashmir’s Finance Minister Haseeb Drabu said many states questioned the reasoning behind imposing a cess instead of a higher tax rate, but ultimately all members reached a consensus on levying cess.
“Many states along with Kerala questioned the reasoning behind cess and not a higher tax rate than 28 per cent. Finally, everyone went with the Centre’s reasoning to levy cess to fund compensation for states. There was also discussion regarding the increase in higher tax rate from 26 per cent to 28 per cent. It was decided that in order to give benefit to taxpayers for reduction of the lower rate from 6 per cent to 5 per cent, rate will need to be increased from 26 per cent to 28 per cent,” Drabu said.
Jaitley said cess was chosen over a higher tax rate to avoid additional tax burden on taxpayers. “There is a rough calculation of Rs 50,000 crore required in the first year of compensation. If compensation is to be paid through tax collection, its cascading effect would be Rs 1,72,000 crore of tax… it will be a huge burden on the taxpayer, so we decided against it,” he said.