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GST Rates and its Impact

Feb 22, 2017

The GST council has finalized a four-tier Goods and Services Tax (GST) structure that will range from 5% to 28%. The move is a significant step towards the implementation of the biggest indirect tax reform, which the government hopes will protect the common man from inflation. The fixing of rates by the GST council marks a major milestone towards the rollout of the solitary tax that will substitute various state and central levies and will create a seamless national market for goods and services. The four GST slabs are 5%, 12%, 18% and 28%.

The four GST rates are determined on the basis of the use and type of goods and services. The four rates are as follows:

  • 5% – It will be levied on essential food items of mass consumption. This will include products such as spices, tea and mustard oil.
  • 12% – It will mostly include processed food items.
  • 18% – It will include items such as soaps, oil, toothpaste, refrigerators and smartphones.
  • 28% – It will include two tiers: First tier will include white goods and cars and the second tier will include sin goods such as tobacco products, luxury cars, pan masala and aerated drinks. Also, the second tier will invite 28% plus cess.
  • Zero rate GST will be applicable for the 50% of goods falling under consumer price index. This will also include food grains. Further, the central government has given power to state government to levy 2% extra or lower tax over and above the rate of SGST.
  • Zero rate GST will be applicable on 50% basic commodities that are included in the Consumer Price Index. This will include food grains and is expected to help the rural population and control inflation to a large extent.


Industry Welcomes New GST Rates

Industry experts welcomed the decision on the GST rates, which they believed was a mixed bag. The government plans to roll out the new tax regime from April 1, 2017. The Centre’s original proposal of 6% as the threshold rate and 26% as the highest slab was modified after states including Kerala said that they wanted the lowest slab at 5%, which is the current threshold rate for value-added tax in many states.

To determine the GST rate, government introduced the concept of “Revenue Neutral Rate” means the tax revenue rate of the Central Government and State Government will remain the same under the GST as is under the present Indirect Tax structure in India. The rate will not be compromised even after allowing credit of GST. Other important issues such as inflation, was also given attention to for determining GST rates.
Let’s see whether cess will be levied on GST?
GST will be levied with cess on some goods such as luxury cars, tobacco, aerated drinks, etc. that fall under the 28% category. This will help compensate the revenue of the government.

Read: How pocket-friendly will GST be for you?

Services Bracket

Let’s have a look at the GST rate on services. Though the tax rate for services hasn’t yet been confirmed, it is expected to attract 18% GST. Some of the services that attract higher abatement will be put in the lower tax slabs of 12% or 5%. Also, the central government is of the view to levy 4% GST on gold. However, the decision has been put off until it is decided which items fall under which tax bracket.

Revenue Secretary Hasmukh Adhia said, “A committee of officials will decide which items will go in which tax bracket, but it will be determined keeping in mind the overall tax occurrence currently.” He added that exports and special economic zones will be zero-rated.

One of the significant characteristics of GST is the composition scheme introduced for supplying support to small businessmen. Under this scheme, the rate will be reliant on the aggregate annual turnover of the applicant. This limit is 50 lakhs and rate is expected to be somewhere between 1% and 3%. However, it will not be less than 1% of the annual FY turnover.

The Impact of GST Rate on Businessmen

Though the government is yet to decide which item falls under which tax bracket, but for now, businessmen can determine applicable GST rate on goods based on estimates. The GST rate on goods will be approximately be equal to the rate derived by adding up excise duty and VAT levied currently on such goods. For instance, if currently excise duty on car is levied at the rate of 12.5% and VAT is levied at the rate of 13.5%, then it has been taxed at 26%. Hence, it can be deduced that under GST, tax will be levied on it at the rate of 28%.

The Verdict

Due to the GST rate structure, the tax rates of many goods will rise and likewise, the rates of many goods will decrease. But businessmen should analyze the difference of rate on goods dealt by them and work accordingly. Similarly, consumers should try to understand the tax effect on goods before consuming them.

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