Millennium Post

4-tier GST structure of 5-28% on anvil, Govt hopes to tame inflation

A four-tier GST tax structure of 5, 12, 18 and 28 per cent that aims to lower tax incidence on most goods and keep out essential items was decided by a high-powered council today -- a major breakthrough for the rollout of the Goods and Services Tax regime from April 1 next year.

Luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, will be taxed at the highest rate and would also attract a cess in a way that the total incidence of tax remains at almost the current level.

With a view to safeguarding the interest of poor and keeping inflation under check, half the items in CPI basket like foodgrains, would not be taxed at all, while there would be two standard tax rates of 12 and 18 per cent.

The lowest rate of 5 per cent would be for common use items under the GST regime targetted to be rolled out from April 1, 2017.

After differences kept away a consensus on the issue at the last meeting, the all-powerful GST Council, headed by Union Finance Minister Arun Jaitley, has decided to impose an additional cess. It would be the difference between the current incidence and the 28 per cent rate, not leading to increase in the final taxation.

Tobacco currently attracts about 65 per cent total tax and for aerated drinks, the current rate is about 40 per cent.

Announcing the decisions arrived at the first day of the two-day GST Council meeting, Jaitley said highest tax slab will be applicable to items which are currently taxed at 30-31 per cent (excise duty of 12.5 per cent plus VAT 14.5 pc).

“...finally the consensus is that these items, with a cascading effect of 30-31 per cent, will now be taxed at 28 per cent, but with a rider. And the rider is that in this category there are several items which are now being used increasingly by a very large number of people, particularly the lower middle class. So for them, 28 or 30 or 31 per cent rate will be higher, and so we are transferring them to 18 per cent,” Jaitley told reporters here.

The final list of items for each tax bracket will be worked out by a committee, Jaitley said, adding that soap, oil, shaving stick, toothpaste and such products will likely to move down to 18 per cent bracket.

Chief Economic Advisor Arvind Subramanian said the rate structure “should probably serve to lower inflation...and should probably bring it down.”

For most items, GST will be excise duty plus VAT and that incidence will decide on which tax bracket particular goods or items fall into.

Asked about the incidence on automobiles, Jaitley said: “There is a difference between cars and luxury cars. Cars will come under 28 per cent, but luxury cars owners can afford to pay a little more”. Higher taxes for compensating states would have been “hugely burdensome for consumers” and the incidence of cess will not add a single rupee to prices, the finance minister said.  

He added Rs 50,000 crore would be needed to compensate states for loss of revenue from the rollout of GST, which is to subsume a host of central and state taxes like excise duty, service tax and VAT, in the first year. The 4-tier tax structure agreed to is a slight modification over the 6, 12, 18 and 26 per cent slabs proposed, which were discussed at the GST Council last month.
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