With the announcement of the tax slabs by the GST Council, the biggest economic reform since the 1991, economic liberalization is now a step closer to implementation by 1st April 2017. The GST council has agreed upon four tax slabs—5%, 12%, 18%, and 28%. Further, an additional cess will be levied on certain luxury goods like high-end cars, pan masala, aerated drinks and tobacco.
Implications of the latest developments
The government has repeatedly affirmed its commitment to a revenue-neutral rate along with a non-inflationary tax rate. The former was a guarantee to the states that they won’t lose out on revenue by transiting to the GST. The latter was about identifying a rate or multiple rates that would not cause prices of goods and services to rise sharply.
Transition to the nearest slab
Implementation of GST through four rates will prevent huge variations in the new rate as compared to rates of existing indirect taxes like Excise, Central, State Value Added Tax etc. Presuming all services fall in the 18% tax slab, consumers will have to pay a nominal increase as compared to the existing setup of 15% service tax plus additional cess. This increase can easily be negated if service providers pass on their savings from the transition to the GST, to their customers.
As far as goods are concerned, the new tax rate is likely to be close to the existing tax rate applicable on products. So, a product where manufacturers and sellers pay a rate of 30%-31% towards Excise and VAT combined may fall in the 28% tax slab. So, electronic products or white goods like washing machines that fall in the 30%-31% slab may become cheaper.
However, ACs and TVs that fall in the 18%-20% indirect tax rate may end up in the 28% slab, which means you may have to shell out more for such products.
Zero or low tax on necessities
Food grains and other necessities may be cheaper since no tax will be charged on these products after the switch to GST. Further, to ensure that the GST does not result in increased inflation, around 50% of the constituents of the Consumer Price Index will continue to remain tax free. The CPI inflation figure is calculated based on the price movements in the CPI Index. With half the CPI Index basket attracting zero tax, the transition to the GST will not have an adverse impact on the budget of the common man.
Nations that opted for a single GST rate for all products often witnessed basic products such as food become costlier. The four-slab structure allows the government to keep some products tax free while retaining other basic goods in the lowest i.e. 5% tax slab.
Impact of the cess
The additional cess to be levied on luxury goods as a sin tax is a debatable issue. For starters, the idea of an additional levy over and above the GST rate strikes at the fundamental benefit of the mechanism—a single rate for a single product or service throughout the country.
Entry tax or Octroi, Value Added Tax or sales tax, countervailing duty imposed by the Centre—the GST will include all these taxes and will remain the only tax payable by manufacturers, sellers, and service providers alike.
Imposing the cess will mean car makers will have to pay tax at one rate for normal vehicles and another rate for luxury vehicles. Now, defining how a standard vehicle differs from a luxury car will result in uncertainty, additional paperwork, and scope for disputes and litigation due to interpretation issues.
Overall, the introduction of the 4-slab setup combined with the cess provides adequate scope for the government to avoid revenue shortfall and prevents increase in inflation even as the industry and service providers enjoy the benefits of uniformity, consistency, and transparency in the new tax setup.
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