Tax World reacts to announcement of GST Rates for Goods & Services

Government as promised has released the rate schedule covering over 1200 items thus sustaining the GST momentum. Now states have to align realistically and in a meaningful way, which they had been so far on this subject. No big shocks and surprises and the existing Tariff format with the needed changes have come into place. Indeed a crucial leap and hearty compliments to those who had put their heads into it.

The critical question is will GST drive itself into the system on 1st July. One should understand that a New Legislation can take off without difficulty on an existing format. Whereas it's not that easy to take off, if it involves mutual trust, cohesion, commitment and involvement between the participating partners in the Federal Structure. The backbone of GST implementation is the technology orientation, induction of all participating players and it's smooth implementation.

Any amount of preparedness still appears to leave a huge vacuum. Looks like the magic rope in the hands of Devaki trying to latch and tie down the Mystic Mesmeriser Lord Krishna, always shirt by inches.

So who is to blink first. At this pace Government will be unwilling to do that. Trade has to take this sensible call and initiative and Government will happily extend it after proclaiming it as a Trade accommodation.

Intact trade should suggest a trial period, before the final whistle and Green light is blown and shown after which it becomes irreversible. 

The multiple tax slabs for services, and, the segmentation within hotel services and air transport‎, will invite some scope for comment for those who were hoping for greater simplicity. The practical complications on services will be multiplied when the valuation of services is to be undertaken.

We shouldn't miss applauding the FM and team for achieving a near impossible balance of fixing rates which can tame inflation while still ensuring revenue neutrality.

Most importantly GST from 1st July, 2017 is a reality. That is a seminal moment for the country. 

It appears that the GST Council, in fixing the rates for goods and services, has limited its focus on meeting the primary objective of removing the ill-effects of tax cascading and creating a seamless credit chain. Fixation of rates as a part of tax policy, which is an integral part of the design of any indirect tax system i.e. the power to tax, ought not be confused with rates being fixed on goods and services for implementing GST for meeting the primary objective.  The current exercise is essentially arithmetical in nature and not as much a decision in exercise of the power to tax, which continues to vest with the States and the Union.  The rates fitment table has followed a common thread of thought i.e. (i) find the current tax incidence on each category of goods and services; (ii) eliminate the effect of tax cascading in that category; (iii) arrive at a rate that is closest to bring about the same effective rate of tax; and (iv) fix the peak rate for items that attract the compensation cess and luxury goods and services.  In simple terms, the rate notified for each category is a revenue neutral rate for that category.  Most services falling in the 18% category is not a surprise as the Union had deferred its decision to enhance the service tax rate ahead of GST. In aforesaid method, the outcome is bound to inherit the distortions of multiple rates in the current tax system.  Thus, GST when implemented would not remove the trade distortions caused by multiples rates and the litigation fatigue arising out of “classification” would also remain.

The Council decision on services rate structure reflects the logic applied for goods, basically to stay close to current effective rates. This has led to a less than ideal multiple rate structure for services which we hopefully will merge as we go along. Would have liked to see a decision on transition credit provisions specially on the presumptive excise duty credit as this will decide the behaviour of stocking/ unstocking which is critical for the industry. Hopefully we will have clarity in the June 3 meeting. July 1 implementation now looks imminent so all need to brace up for the last lap in the coming weeks. 

A tight rope walk has been achieved in terms of aligning commodities in to various tax rates in a manner that the incidence of tax is not too different from the current incidence. A single rate regime for services has been given a go bye by introducing a four rate structure.

The multiple tax rate regime is not new for indirect taxes. In the pre VAT sales tax regime the State sales tax schedules were littered by different tax rates in additions to varying descriptions across different State schedules. Simplification required fewer rates and that is what was achieved when VAT was introduced. The Centre went a few steps ahead and introduced excise at a single rate. The outcome was a dramatic reduction in classification disputes. Multiple rates for goods and services are back and will bring with it challenges on classification and consequently avoidable litigation.

Inverted tax structure is most likely outcome of taxing certain goods or services at lower rate. The GST law currently provides grant of refund in context of inverted structure. Only civil construction services have been denied the refund of overflow of input tax credit. Also by taxing services such as transfer of right to use goods and transfer of right in goods at the rate of tax and cess that would have been applicable on supply of such goods, the issues of inverted structure have been overcome in case of such services.

The current abatements have been kept in mind while fixing tax rates on aggregators & air travel and current exemptions maintained, save for the addition of a new exemption to GSTN to overcome the issues faced by GSTN in current regime.

Rates for gold is yet to be notified. Two things deserve a mention here. Firstly, lower rate of tax would encourage better compliance in this sector and secondly in Indian economy gold is not merely perceived as an adornment but effective savings vehicle.

Now with the Government running on their plan, it is for the industry to quickly assess its impact based on the GST rate structure, make their business plans and devise their anti-profiteering strategy. 

May 18 and 19 are historic days for GST. At Srinagar, the GST Council put out a united front and announced rates of over 1200 goods and services. In a clear break from the current regime, services have also been bracketed into 4 different bands - 5, 12, 18 and 28%.  The underlying theme of rates for goods and services has been a balancing act between necessities and affordabilities.  Essentials are likely to be cheaper in GST and luxuries costlier. However, even in this mix, there are some peculiarities.  Real Estate is likely to be most adversely affected in GST.  Sale of flats will now attract tax at 12% with no refund of overflowing input tax credit. This is already higher than the 6-7% applicable rate even if an abatement for land is provided. With cement at 28%, steel at 18% and works contracts not involving sale of land at 18%, the builders will need to achieve at least 50% value addition if they are to utilise the input taxes.  So we can expect the prices of flats to increase in GST. Banking and financial services are now taxed at 18%.  The experts had recommended a 12% rate for this sector to ensure banking remains affordable.  Coupled with greater requirements for working capital in GST, having a higher rate of GST may have ripple effect through the economy.  On the goods, the rates for a few products such as detergents, shampoo, etc at 28% is surprising. These are everyday use items and may impact the common man.  There is no doubting the intentions of the Policy-makers when the goods and services were classified under GST.  The hope is that the tax authorities will approach classification in the same statesmenly manner and not convert classification into a hotbed of litigation.

& Farhad Dalal

Pursuant to the recent meeting of the GST Council, the most awaited concern pertaining to the rate of tax under the new regime, appears to have some visibility. Various supplies have now been categorized under the tax slabs which were agreed in the earlier Council meets i.e.- Nil, 5%, 12%, 18% and 28%. While it appears that the fitment formula, which intended to categorize supplies based on the existing burden of taxes, has been made applicable to most goods, there are some surprises along the way. These would include products being brought under the lower tax rates as well as products classified under the higher tax slabs along with a compensation cess, as applicable. Further, the high-end tax rate of 28% originally reserved for ‘sin goods’ now also covers materials / goods used in construction, cosmetics, toiletries, auto parts etc. However, the deal sweetener here is the NIL or lower rate category, which covers most essential items.       

Extending rate classification to services too, was an unforeseen move. Transitioning from a single rate of service tax, to a four-slab structure (i.e. 5%, 12%, 18% and 28%) would surely not be an easy task. Adding to the tax and state-wise compliance burden, is the task of classifying a service under the applicable service codes.

It would be pertinent to note that a four-rate classification of supplies, may dilute one of the purpose of GST viz. to be less litigious in nature.

Overall, the above can be summarized as a mixed bag of good and bad news. 

The two day Srinagar meeting of the GST Council has been able to achieve consensus on rates for majority of the goods and services, barring a very few items like textiles, gold etc. for which rates will be decided on the 3rd of June.

The rate structure has come out as a bit of surprise with many items finding place in the 28% rate bracket. On the services front, a four tier rate structure was unheard of. There are services, like five star hotel etc., being taxed at 28% GST. Many of the service tax exemptions available currently have been continued and the RCM list almost remains the same. In some situations where a 5% GST rate has been decided e.g. transport, credit has been restricted to input services, thereby defeating the entire fungibility principle under GST. Except for multiple state return filings for a service provider, resolution of the issue of payment of dual taxes and an enhanced service tax rate, albeit with credit on goods (which has again got restricted for some), it appears that the tax applicability will almost remain the same for service providers, however, the compliance burden increases manifold times.

With the aforesaid rate announcements, the Government has crossed all the bridges for rolling out GST from 1st July, and it seems that the decision would not change. This puts immense pressure upon the industries to speed up their preparation. With rates just out, commercial negotiations and discussions between vendors and customers and rolling out a revised price list post GST in time looks extremely challenging. This is apart from the other preparations on IT that needs to be completed before time. Large IT vendors have still not come out with final GST patches. Clearly, we may see lot of companies unprepared on July 1, specifically SMES, though, there is still time till August 10th to gear up, which is the first reporting date post GST. Needless to say, invoicing in requisite formats will have to happen day 1.

India finally moving on to GST is a very positive development for the economy. However, the structure could have been kept simple and the Government could have avoided multiplicity of rates. Also, if there is time to implement until 1st September, there is unclarity on the urgency shown in implementing considering that many are yet unprepared. Companies should have been given time to determine net tax impact and also ascertain taxability, for which 40 days may not be enough. It is hoped that some extension is granted considering the criticality of being prepared on time qua payment of correct GST and smooth flow of credits.

& Bhadresh Vyas

With the finalization of majority of the GST Rates and GST Rules, the decision making functions of the GST council in the pre implementation period have almost reached an end, barring the 6 rate fitments and the two GST Rules (including the very important Transition Rules) which should be finalized on 3rd June, 2017.

As far as sentiments are concerned the fitment of rates has brought about a mix bag of feelings, with a bull on goods and a rather low on services. Reduction in effective tax incidence for most of the goods as compared to the current regime has been welcomed by the industry at large, with the decrease in tax on Intermediary goods and Capital goods being one among the most merrily accepted change. Conversely, allocation of services amongst four different GST Rates may not have augured well the service sector. Further, increased compliance burden for service providers and assignment of 18% as standard GST rate is being regarded as a step backward for the industry. However as pointed out by the FM, as far as the math behind the tax is concerned, the services are most likely to be indifferent to change in Tax structures, as the effective increase tax rates are likely to be negated by the allowance of GST credit on input side on goods (which is currently unavailable). As per the initial reports a multi-layered tax structure slab has been proposed for Hotel and Restaurant business, which may further add up to the woes of the industry players. On the brighter side, most of the exemptions are likely to be grandfathered in the GST regime, including exemptions for healthcare and education.

Overall with a high positive on goods and a neutral on services, the fitment of rates have been rather satisfactory. 

The timing of this announcement is probably one amongst the most critical thing that needs notice. With only 40 days to GST implementation, organization will now have just enough time to re-calculate and rework their cost sheets to zero down on a final price for their products /services to ensure they are able to decipher the actual cost savings due to GST synergy and accordingly pass on the benefits to the end consumer in the true spirit of GST (while avoiding a default of anti-profiteering clause as well).