GST Rates

One more GST challenge is out of the way…

With the GST Council deciding on a 4-tier structure for rates, the big challenge is finally out of the way. Although, there are still some differences on centre-state sharing, they are minor factors. The big story now is to understand the key takeaways from the GST rates…

Inflation may not be impacted… 

The big take away from the GST rate is that it is not likely to negatively impact inflation. What the GST Council has done is to put more than 50% of the CPI basket into the 0% tax regime. Additionally, most of the products of mass consumption will be taxed at just 5%. This will ensure that the inflation rate does not get negatively impacted due to higher GST rates. The fear was that introduction of GST may lead to inflation going up by 200 bps, but that does not seem to be the case for now. That seems to be good news for the RBI’s dovish rates trajectory.

Services will become expensive… 

This is largely true. In fact, most services could end up becoming more expensive. Be it trading in the markets or paying your phone bill or even eating out at a restaurant; they could all end up becoming more expensive. Currently, service tax is imposed at a base rate of 14%. On top of that you have 0.50% Swacch Bharat Cess and an additional 0.50% Krishi Kalyan Cess. This takes the total service tax levy to 15%. Under the new GST dispensation, the rate of tax is likely to be 18% which is the higher end of the standard tax band. This will entail a 3% increase in the rate of service tax across most services. So, most services may become more expensive for the end user.

What about Sin Products?

The GST Council has classified aerated drinks, tobacco and many luxury items under the definition of sin products. The good news is that they will not see a big change in tax rates. For example if cigarettes were paying effective 31% tax, then in the new model, the GST will be at 28% peak rate and the additional 3% differential will be charged in the form of a cess. The overall impact is not likely to be too serious. However, cess will be reviewed on an annual basis.

Big story could be compliance…

Overall, the impact of the GST is expected to be neutral on industry. However, the big story could be increased compliance. The idea of GST is to bring more of businesses under the tax bracket by expanding the tax base. With a lower cut-off for paying GST, it will ensure that more of small and medium businesses come into the tax net. For a country, where the ratio of tax payers to total population is extremely low, this is a welcome step. For the process of economic reforms as a whole, GST will be a big boost! ©

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