national business
Watered Down Tax Revolution
One major contention is cess levied above peak rate of 28% on luxury, demerit goods
By Asit Manohar
G
oing by the four-slab tax structure finalized by the
Goods and Services Tax (GST) Council, one can safely
forget about the long talked about idea of transition
to a ‘uniform tax structure’ or a ‘one nation, one tax’
regime, at least in the foreseeable future.
A GST structure with rates of 5 percent, 12 percent, 18 percent
and 28 percent, additional cess over
the peak rate and
the requirement of multiple
registrations in each state
for the supply of goods and
services would implicitly
mean that the complexity
of the tax regime is here to
stay. In other words, this is
a significant dilution from
the original idea of a historic
indirect tax reform to a
single rate. Instead of
dealing with two main tax slabs for goods (5 percent and 12.5
percent), the industry will now have to deal with three rates 5,
12 and 18 percent.
But, there wasn’t much the Narendra Modi government
or the GST council could do about it. At this stage, this is the
only structure that could generate the political consensus and
agreement among states. It is good to begin the reform with
some inefficiency that could be rectified later, rather than
indefinitely delaying the reform.
THE BIG DEAL
The four-slab structure announced on November 3 envisages
accommodating most essential items and mass consumption
items in the 0-5 percent bracket. Union Finance Minister Arun
Jaitley said this chunk would take care of 50 percent of the
consumer price index basket. Food grain is likely to be exempted.
This partly addresses the big worry of the Reserve Bank of India
that the GST rollout will erase the hard-won gains on CPI inflation
over the last 2-3 years.
There are two standard rates set — 12 percent and 18 percent.
In most likelihood, 18 percent is likely to be the key GST rate that
will accommodate most goods and services. Eventually, there is
likelihood that these two rates will be converged closer to the 18
percent band. Some of the goods which are currently taxed at
28 percent will be brought into the 18 percent slab and certain
items such as ‘white goods’ that are currently taxed at 30-31
percent and soaps, oils and shaving kits will be moved to the 28
percent slab.
One of the major contentious points is the cess that will be
applied above the peak rate of 28 percent for luxury and demerit
goods. Primarily these are aerated drinks, pan masala, tobacco
and luxury cars. The final incidence of tax on these items will
remain the same since the cess will be calculated above 28
percent to match the existing rate (40 percent for all except
tobacco, which is taxed at 65 percent). But, imposing cess over the
GST rate is a major departure from the original concept. Jaitley
has a good rationale for generating the amount to compensate
the states from the cess rather than direct tax collection. “If the
compensation is to be made through tax collection, the cascading
effect will be Rs 1.72 lakh crore, because out of that 50 percent
will go to the states and 50 percent to the Centre. Then, out of
the Centre’s share, 42 percent would go to the states, along with
compensation. So, paying it out of tax will be a huge burden on
taxpayers. So, we decided against that,” the FM told reporters
at a presser.
GREY AREA
The bigger task for the GST council is now allocation of specific
goods in each tax bracket. This will be done by a committee of
secretaries. The common man would then come to know where
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The Dayafter November 16-30, 2016