Closing in on GST rates - Dr Sanjiv Agarwal - Article published in Business Advisor, dated November 10, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVII Part 3 November 10, 2016 11 Business Advisor
Closing in on GST rates
Dr Sanjiv Agarwal
The GST Council in its fourth sitting on 3-4 November,
2016 zeroed in on the GST rates with consensus
amongst all the states and the Centre. The tax rates
have been set in a four-slab tax structure of 5 per
cent, 12 per cent, 18 per cent and 28 per cent with
lower rates for essential items and higher rates for
luxury and demerit goods. Such items may also attract
an additional cess to create a corpus for funding
requirements for any revenue loss to be compensated
by the Centre to the States, if such a situation arises.
In fact, there will be seven rates of taxes as follows:
0% Exempted goods
5% Necessary/ daily use goods
12% Standard rate I
18% Standard rate II
28% Peak rate for luxury goods/ demerit goods
?? On gold/ jewellery
?? Cess on luxury goods, tobacco etc.
So far as standard rate is concerned, it is proposed that there will be two
standard rates of 12% and 18%. What will be the fate of services is not
known. Simply putting all services in the 18% slab shall result in overall
inflation impact as all services will become costly by three per cent straight.
It may be a good idea to have two baskets of tax rates for services. Certain
essential services may be placed under 12% and others in 18% slab.
Services like health care, life insurance, coaching etc. deserve to be either
exempt or at best be under 5% slab. Multi-rate structure will bring in
classification issues leading to tax disputes and, hence, litigation.

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It is hoped that about 50 per cent of the goods in consumer price index
basket and items of mass consumption shall be exempt or zero-rated which
will essentially include food grains. On the other end, top of bracket of 28%
and, of course, cess, shall be levied on luxury goods and cars/ tobacco
products. Such goods which suffer a higher tax will hardly be beneficial to
consumers or taxpayers.
The 5% tax rate will be on items of common use. Most of the other items will
be subject to 12% and 18% tax which still will be lower than the existing tax
impact (central excise plus service tax).
GST Council is justifying the levy of cess over and above 28% tax rate so as
to garner additional resources to compensate the states for revenue loss on
account of GST in the first five years which shall be lapsable after five years.

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Rs 50,000 crore may be required to compensate states. It is learnt that
clean energy cess may also continue to be levied. These cesses, per se, are
against the concept of GST and will add to distortions. Whether they will be
subject to input credit or not is also not known at this stage.
The rate of cess has not been decided and it may be more on certain items.
So there could be a situation of multi-rate cess making GST a complicated
affair. What would happen after five years cannot be spelt out now. Whether
cess will be discontinued or merged in GST rate cannot be predicted.
The overall tax rate structure may lead to inflation as services shall become
costlier unless the Government decides to put them in the 12% bracket,
which is unlikely. Having more than one rate for services will also
complicate GST tax structure.
The proposed rate structure may result in operational cost reduction,
efficiency gain, lower logistics cost, but higher level compliances in smaller
companies and particularly unorganised sector.
Cross empowerment/ dual control
The GST Council could not arrive at any decision on dual control of Centre,
as well as States over assessees (cross empowerment model) whereby both
will use scrutiny and audit powers in respect of assesses.
What next
In view of the developments, the following action points have been finalised:
a) Meeting scheduled for 9-10 November has been called off which was
supposed to discuss draft legislation;
b) All State Finance Ministers shall meet informally on 20 November, 2016
to discuss and iron out the differences/ issues;
c) Formal GST Council meeting will be held on 24-25th November, 2016 to
approve remaining issues of control and draft legislation;
d) GST Bill may be taken up by Parliament in winter session between 16
November and 16 December, 2016;
e) Secretary-level team shall identify the goods and services for the purpose
of tax slabs in which they will be placed.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur.)