Talking Point. Finally, consensus on GST rate structure

Even before the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 received the ascent of the President of India, two key issues being debated in great length have been the rate of GST and administrative control over the assessee. The issue of rate of GST gained further prominence with a demand that upper cap limit of 18 per cent of GST be entrenched in the Constitution per se .

With the passage of Constitution Amendment Bill and given the ambitious deadline of April 1, 2017 for the roll-out of GST, it was imperative that the GST Council took a stance and decided on the rate slabs at the earliest, which the GST Council seemed to have achieved in its meeting on November 3.

The GST Council, at the recent meeting, decided and agreed upon the GST rates of 0, 5, 12, 18 and 28 per cent. In an attempt to compensate States for loss of revenue on account of change in indirect taxation regime from origin based to destination, certain goods in the peak rate bracket would be susceptible to an additional levy of cess for five years from implementation of GST.

In the wake of the above GST structure, from a statement by the Finance Minister, it appears that the GST rates would be assigned based on the prevalent effective rate taxes on the products.

Also, the goods which are expected to attract a tax rate of 18 to 28 per cent currently attract an excise duty of 12.5 per cent and VAT of 14 to 14.5 per cent. Besides, based on the Finance Minister's statement, all goods presently attracting about 27 per cent tax rate are not expected to be automatically taxed at the peak rate of 28 per cent. The products which are commonly used by the lower middle class are expected to be taxed only at 18 per cent.

The impact of the above broad framework of GST slab rates on different industries would make for an interesting analysis. The lowest rate of 5 per cent proposed to be levied on mass consumer goods would ensure that the common man is not saddled with additional tax burden under the GST regime. However, on the contrary, white goods and consumer durables are proposed to be taxed at a peak rate of 28 per cent, notwithstanding the mass consumption of the same and consequently, the effective rate of GST on such goods would increase. The instant industry was anticipating that such goods would be taxed at 18 per cent and proposal to tax at 28 per cent has taken the industry by surprise.

In the light of the above announcement, industry is curiously awaiting the quantum of cess that is likely to be imposed on goods and more importantly the categorisation of products into 12, 18 and 28 per cent.

On services, while the rates are yet to be finalised, it is emerging that the GST rate of 18 per cent would apply on all services other than the ones which presently enjoy some form of exemption or abatements, which would translate into higher working capital requirements. It is further expected that the essential services are taxed at a lower standard rate of 12 per cent.

While the broad GST rate slabs have been agreed by the GST Council, the list of goods and services that fall under GST rate slab would determine the winners and losers on account of GST.

With multiple tax structure being ingrained under the GST regime, it is expected that rate of GST specifically in respect of goods is aligned to Harmonised System of Nomenclature. However, the litigation around classification of goods and services appears to be imminent.

Notwithstanding that final schedule of goods and services with applicable rates is yet to released, the very consensus amongst the GST council members on the rate structure is a significant progress in the implementation process of GST.

Thus, with the Government effectively clearing decks for the imminent implementation of GST, it is in industry’s own interest that it start gearing up in a systemic manner.

Accordingly, it is crucial that industry gear up their system to appropriately capture multiple rates of GST/cess across goods and services with former being further linked to the Harmonised System of Nomenclature and augment its reporting system as well.

The writer is Partner, BMR & Associates LLP. With inputs from Mamatha Anand, Associate Director, BMR & Associates LLP