India Insight:Fixing the GST rate–one step forward

Consensus reached on GST rate structure: The GST Council has finalisedGST rate slabs of 5%, 12%, 18% and 28%. The approved 4-tier GST ratestructure instead of a single-tax rate could complicate implementation andlead to classification and exemption disputes, thus reducing efficiency gains,in our view. That said, we believe that a multi rate tax structure still worksbetter for India considering the income disparity in the economy and in orderto keep inflationary pressures under control. However, the policymakersshould strive towards a single-rate GST as a medium-term goal to facilitatecompliance and administration, in our view. We believe a consensus reachedon tax slabs is a step in the right direction and increases the probability offurther GST legislation (the Central GST or CGST and Integrated GST orIGST) being passed in the upcoming winter session of the parliament (startingmid-Nov), thus paving the way for implementation of GST next year.

Details of the proposed rate structure: The GST Council hasrecommended 4tax brackets – a 5% rate will be applicable for goods of massconsumption; 12% and 18% will be the ‘standard’ rate for most goods andservices; and luxury goods will attract a tax rate of 28%. The exemptedproducts include petroleum products and alcohol. Nearly 50% of the CPIbasket (including food grains) will continue to be outside the tax net. The GSTrate on gold will be finalised post the mapping of rates to categories. Thedemerit goods or sin goods, including tobacco products, pan masala, aerateddrinks and luxury cars, will continue to be taxed at their present rates (rangingbetween 40% and 65%). The difference between current tax incidence onthese items and 28% will be charged as a cess. The collections from this cessalong with the clean energy cess will form part of the state compensationpool. It needs to be noted that the centre will need to compensate states forany revenue loss from the transition to GST for the first 5years.