GST Council decides on 4-tier tax structure, lowest rate fixed at 5 per cent

Announcing the decisions arrived at the first day of the two-day GST Council meeting, Finance Minister Arun Jaitley said highest tax slab will be applicable to items which are currently taxed at 30-31 per cent (excise duty plus VAT).

By: PTI | New Delhi | Updated: November 3, 2016 7:59 pm
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A four-tier GST tax structure of 5, 12, 18 and 28 per cent, with lower rates for essential items and the highest for luxury and de-merits goods that would also attract an additional cess, was decided by the all-powerful GST Council on Thursday. With a view to keeping inflation under check, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate.

The lowest rate of 5 per cent would be for common use items while there would be two standard rates of 12 and 18 per cent under the Goods and Services Tax (GST) regime targetted to be rolled out from April 1, 2017.

Announcing the decisions arrived at the first day of the two-day GST Council meeting, Finance Minister Arun Jaitley said highest tax slab will be applicable to items which are currently taxed at 30-31 per cent (excise duty plus VAT).

Luxury cars, tobacco and aerated drinks would also be levied with an additional cess on top of the highest tax rate. The collection from this cess as well as that of the clean energy cess would create a revenue pool which would be used for compensating states for any loss of revenue during the first five years of implementation of GST. The cess, he said, would be lapsable after five years.

Jaitley said about Rs 50,000 crore would be needed to compensate states for loss of revenue from rollout of GST, which is to subsume a host of central and state taxes like excise duty, service tax and VAT, in the first year.

While the Centre proposed to levy a 4 per cent GST on gold, a final decision was put off, Jaitley said.

Asked about the incidence on automobiles, Jaitley said: “There is a difference between cars and luxury cars. Cars will come under 28 per cent, but luxury cars owners can afford to pay a little more”. Jaitley said Kerala had an alternate opinion on highest tax rate but “all decisions were taken by consensus… We have avoided voting”.

Higher taxes for compensating states would have been “hugely burdensome for consumers” and the incidence of cess will not add a single rupee to prices, he said.

The collection from this cess as well as that of the clean energy cess would create a revenue pool which would be used for compensating states for any loss of revenue during the first five years of implementation of GST. The cess would lapse after five years and any surplus to the cess pool at the end of 5 years would be shared between the Centre and states.

Jaitley said about Rs 50,000 crore would be needed to compensate states for loss of revenue from rollout of GST, which is to subsume a host of central and state taxes like excise duty, service tax and VAT, in the first year.

The 4-tier tax structure agreed to is a slight modification over the 6, 12, 18 and 26 per cent slabs proposed, which were discussed at the GST Council last month. The structure agreed to is a compromise to accommodate demand for highest tax rate of 40 per cent by states like Kerala.

While the Centre proposed to levy a 4 per cent GST on gold, a final decision was put off, Jaitley said. Delhi Deputy Chief Minister Manish Sisodia favoured 2 per cent tax on gold, along with some other states.

Explaining the tax structure, Jaitley said foodgrains used by common people would be at zero-rate so that the impact of inflationary pressure on them is the least. The second category of 5 per cent will be on items of mass consumption which are used particularly by common people.

The third category of standard rate of 12 and 18 per cent would accommodate most of the goods and services, which too are likely to fall in this bracket. The fourth slab of 28 per cent would be applicable mainly on white goods, on which the present tax incidence is 30-31 per cent. Those goods used by common man like soap, toothpaste, would be brought in the 18 per cent bracket.

“We are broadly taking it to revenue neutrality and the gains out of this will be set off by narrowing the 28 per cent slab. So you will have lesser items in 28 per cent,” he said.