GST Council meets in Srinagar: Forget the politics of it, look for the rates you will have to pay up

The Narendra Modi government’s decision to hold the crucial Goods and Services Tax (GST) meeting in Srinagar on 18-19 May to fix the rates has been termed as a smart political move to show the world that J&K can be also in the news for reasons other than communal violence and terror-stories.

But more than a symbolic gesture and the politics of it, for the common man the meet is extremely crucial in the GST story.

Here is the story so far. The political consensus is won, the mudslinging on claims and counterclaims on GST has ended, the constitutional amendments and supporting legislations are almost through, now hold your breath to witness the last, but most crucial detail, on the historic GST implementation -- the rates you and me will pay for everything from food to a luxury car in the new tax era that the Modi government wants to introduce from 1 July.

At the end of a two-day meeting currently progressing in Srinagar, you will have a fair idea where you will have to pay more and where less. Most economists are keeping their fingers crossed. “I need to know the rates,” said D K Joshi, chief economist at Crisil, Indian unit of global rating agency, Standard and Poor’s. The GST council, a body of states and the Centre, had earlier finalised a broad rate structure of 5, 12, 18 and 28 percent – and additional levy on luxury and demerit goods such as tobacco, pan and aerated drink products.

 GST Council meets in Srinagar: Forget the politics of it, look for the rates you will have to pay up

A screengrab from the GST web portal.

Most likely, there won’t be any surprises. The essential food items that concerns one-third of the poor population in the country should come in the lower basket, majority of the commonly used items should be in the 12-18 percent and luxury items should be taxed almost at the current rates charging the cess above the 28 percent rate. But the whole picture won’t be as simple as that.

Tax experts have speculated that different products in the same category might attract varying rates under the GST regime. As an MP mentioned during the GST discussion in Parliament, there is confusion on how certain products will be taxed. For instance, coconut oil is used as an edible oil in Kerala while in North India,it is considered only as hair oil. So, in which category will it be taxed? Similarly, “is Kit Kat a chocolate or biscuit”? What will be the tax treatment here? The short point is that the GST council has an unenviable task in hand.

“The possibility of lower rates on certain products in each category cannot be ruled out considering the act that these may be consumed by the weaker section of society. This will, however, increase the complexities in the GST regime. It is, therefore, essential to keep such exceptions to the minimum and have lower rates for certain products in a category only when it is absolutely essential," said MS Mani, senior director for indirect taxes at consulting firm Deloitte Haskins & Sells, in a Times of India report.

The Centre has promised to compensate states for losses in the first five years. What happens if there are losses after that period? Also, there is confusion on division of tax assessment power between the Centre and states on basis of turnover of companies. As per the understanding in the GST council, the states will have powers to assess and administer 90 percent of companies under Rs 1.5 crore annual turnover, while the remaining would be controlled by the Centre. When it comes to taxpayers with more than Rs 1.5 crore turnover, states and the Centre will share the control in a 50:50 ratio. This process will be complex and time consuming. What if the company falls into a different turnover bracket after the first year? These are questions that need answers.

Inflation worries

It is highly critical to keep the rate on essential items at the minimum, else there will be a risk of high inflation. Time and again, economists have warned about this and the government has assured that the GST wouldn’t stoke inflation. This will be a double-whammy for the monetary policy committee (MPC), which is under pressure to cut the RBI’s key interest rate to support growth as well as to keep the inflation battle on. Both Finance Minister Arun Jaitley and Revenue Secretary Hasmukh Adhia have assured that GST won’t be inflationary. Adhia’s rationale is that 60 percent of the items which are currently taxed at average 32 percent (comprising standard rate of excise duty is 12.5 percent, standard rate of VAT is 14 percent, other levies like Central Sales Tax, entry tax and some component of service tax) will now be taxed at a lower 28 percent.

“May I tell you that 60 percent of the income of Centre and state is coming from this level. So there will be reduction (in prices) in all these items. Consumers will benefit in most cases,” Adhia said in April this year. But, the RBI doesn’t seem to share optimism to this degree. Instead, it is on a caution mode. It expects the inflation rate to firm up to 4.5 percent during the first half of FY18 and to 5 percent in the second half, due to a host of factors including the impact of GST.

The industry is anxious ahead of the unveiling of the rate structure as they will have to be ready for revenue impact and corresponding changes in their tax calculations, depending upon what product is put in which category. Also, the fact that the need for multiple registrations will continue under the GST regime too is a disappointing factor for the industry. “This has the potential to result in huge burden of complexity as companies operate in many different states,” Naushad Forbes, President of industry lobby Confederation of Indian Industries was quoted in this Hindu report.

Is the industry and tax department ready for the GST era? Tax experts and industry captains have been asking for more time for the rollout citing that 1 July deadline is too early. Nevertheless, the Modi government is determined to go ahead. Certain hiccups in the initial phase of the rollout are given. But, will it cause chaos for companies that are already hit by demonetisation cash-crunch? One needs to wait and watch.

For the common man, however, the big news is the rates he will be now paying for different products in the GST regime from 1 July. More than the politics of the Srinagar meet, this is what will interest him.

Updated Date: May 18, 2017 11:50:52 IST