Racing against time to roll out the much talked about Goods and Services Tax (GST) from July1, the all powerful GST Council at its meeting in Srinagar finalized the tax rates for different goods and services. The Council attempted to keep the rates of essential commodities low lest the shift to the new taxation structure fuel inflation. The officials, however, are of the opinion that the GST implementation would make essential goods cheaper and bring down inflation rate by nearly 2 per cent. A its Srinagar meeting, the Council assigned tax rates to more than 500 services and 1,200 goods by setting them in five broad rates of 5, 12, 18 and 28 per cent.
The rates have been so fixed that incidence of taxation will come down in case of host of consumer goods. “I don’t think inflation will at all go up because of GST. We have taken special care to ensure inflation does not go up. Our internal estimate is that after the rates are decided, inflation should come down by 2 per cent,” Revenue Secretary Hasmukh Adhia had said after the meeting of the Council. While the current indirect tax regime suffers from significant cascading, which leads to higher cost of goods and services, a free flow of credits across transactions under the GST framework will bring down the tax cost for businesses.
Also, taxpayers or consumers currently have to pay both the Centre and state taxes on a single sale, which adds to increased costs for businesses and consumers. Such an increase in costs adds to the inflationary pressure. The GST, which will be a single nation-wide sales tax replacing a string of central and state levies, will create buoyancy in the economy through better compliance and ease of doing business. In order to protect the interest of consumers, the GST law provides for an anti-profiteering mechanism that will ensure industries that have got relief by way of lower taxes actually pass on the benefit to consumers. “We will try to set it (anti-profiteering machinery) up as early as possible or we will try to identify an agency which will do it. We are working on it,” Adhia had said.
As regards the impact of new tax regime is concerned, the opinion was mixed, though mostly positive. It was opined that pegging the GST rate on coal at 5 per cent will lead to stabilisation of steel prices. The total incidence of tax on coal presently is 11.69 per cent. According to Steel Secretary Aruna Sharma the decision would bring down the input cost and would lead to stabilisation of prices and encourage expansion of steel Plants. Thermal power tariffs too are likely to come down due to lower tax rate on coal. “The coal-based thermal power rates of different power plants may see a downward trends under the new GST regime as lower tax rate of 5 per cent proposed on it,” an official of an independent power producer said. However, it was pointed out that the quantum or proportion of reduction in the tariff could not be ascertained at this point of time because there is multiple layer of levies and charges on coal as well as on electricity.
At present the average price of power of the state-run power giant NTPC Ltd is about Rs 3.20 per unit. Its different plants have different rates of tariff based on fixed cost, levies and other charges. A senior official of a public sector firm had said: “The power tariff would definitely come down but we don’t know to what extent. The new plants have higher rate of tariff because of fixed cost but the older plants rates are lower due negligible fixed cost.” The official further observed that coal is the main input for a thermal power plant and “even a percentage point reduction in tax would mean a lot for power producers. But how much power distributing companies would pass it on to consumer would be seen once the new GST regime is rolled out.”
Consumers in general too would gain as items of daily consumption were likely to become cheaper after implementation of the GST, opined Consumer Affairs Minister Ram Vilas Paswan. FMCG firms Dabur and Emami welcomed the rates on commonly used consumer items stating it would be beneficial but said more clarity is needed to understand overall impact. “The move will benefit consumers at large as they will pay less. Free movement of goods will ensure easy availability and keep prices under check,” Paswan had said.
The GST Council has decided that commonly used products like hair oil, soaps and toothpaste will be taxed at 18 per cent. These items at present attract 22-24 per cent tax incidence through a combination of central and state government levies. “The announcement of 18 per cent GST rate for soaps, toothpaste and hair oil is along expected lines and is certainly welcome. It will have a positive impact on our business,” Dabur India Ltd CEO Sunil Duggal said. He, however, said this covered only about 20 per cent of the company’s business and “we are still awaiting clarity on categories like health supplements, shampoos, packaged juices (among others).”
Expressing similar views, Emami CEO (Finance, Strategy and Business Development) said: “It appears that the rate will benefit us and industry but we need to understand GST (rates) in entirety to comment on the subject.” Edible oil industry body Solvent Extractors Association Executive Director B V Mehta said as far as the sector is concerned there is no change in tax. “It is a no gain no loss situation for us although we had asked the Finance Minister to classify edible oil in zero tax category,” he had said. Besides the officials, the experts too held the opinion that GST roll out would bring down prices of consumer products. “On rates, categorisation of several consumer products like soaps, toothpaste and hair oil under 18 per cent is good news and should see prices drop for consumers. Similarly, several food items such as edible oil, tea, coffee sugar etc have been kept at 5 per cent…which would also bring cheer to the industry,” said Pratik Jain, tax expert with PwC.
The rate fitment has been done keeping in mind the intent of rationalizing the effect of inflation on account of GST, opined Rajeev Dimri of BMR & Associates LLP. In her comments, Saloni Roy of Deloitte Haskins & Sells LLP said there is an expectation for a clear indication on whether the date of GST implementation continues as July 1, which is barely 42 days away. V S Datey, Senior Consultant with Taxmann.com said the rates announced are along expected lines. “As government had already stated that they will not disturb the existing tax structure and they have kept their words, however it seems a lot of work is yet to be done,” he said.
Tax Partner with EY India Suresh Nair said the Council has done a commendable job to have the rate fitment for 81 per cent of the commodities within and up to the 18 per cent GST rate slab. Sudhir Singh of Marg ERP9+ said that the uncertainty on “how will a distributor avail input credit tax after GST implementation for the goods manufactured/ purchased is preventing traders from buying goods and is creating stagnancy in the market. The GST regime is likely to benefit consumers because of lower taxes and increase in efficiency of operations. However, as the test of the pudding is in the eating, one will have to wait for July to see the results.