GST, India’s most ambitious tax reform since Independence took a giant leap after Centre and States agreed on the tax rate structure on Thursday. At present, there are 15-20 tax slabs between the Centre and states. Coal, luxury and sin goods like cigarettes and alcohol will attract cess in addition to the GST.
Arun Jaitley, Finance Minister, said that the GST Council had agreed to zero-rating for nearly half the items in the consumer price index (CPI) basket as well as major food grains, while goods of daily use would attract 5% GST, as against 6% proposed previously.
Also, there will be two standard rates of 12% and 18%; a move meant to blunt the demand for a standard 18% tax. White goods and similar products will face 28% levy, instead of 26% suggested by the Centre earlier.
The cess on luxury and sin goods, and the clean energy cess on coal should aid the Centre to mop up around Rs 50,000 crore to reimburse states for any revenue loss due to GST.
The cess is something that has still not found acceptance. The ideology to come out with the rate structure is to shun any negative impact on the CPI from the inflation outlook.
While explaining the rationale for the cess that has been questioned by many, Finance Minister Arun Jaitley said that there would be a sunset clause of five years, which will be reviewed on a year to year basis. Compensation via tax collections will have a cascading effect. There will not be any additional charges. While tobacco presently attracts 65% tax, the current rate on aerated drinks is around 40%. Also, some products such as soaps, oil and shaving sticks, which would have gone into the 28% bracket, will now shift to the 18% slab.
Multi-Tier GST Creating Classification Problems:
The goods and services tax (GST) Council has finalized a multi-tier GST rate structure. And it has been pointed out that the effective number of rates can well be more than just four. The multi-tiered structure will create numerous classification problems in a quickly changing economy with entrepreneurs innovating with their products and services on a daily basis. Further, this structure is more likely to create rent-seeking opportunities and less likely to push compliance.
The most critical point, however, is that the wish to maintain revenue and the previous tax rates has undermined the transformative potential of the GST. If the GST fails to deliver its committed benefits, it will only create political hindrances to the cause of economic reforms in the medium term. The hard work of more than a decade is at risk of significant dilution.
GST, not Inflation Stoking:
The multi-layered structure, along with a large number of exemptions, could signify that the goods and services tax may not be inflationary as some feared. Nearly half of the items in consumer price index (CPI) basket, together with cereals, will not be taxed under the new rates that will replace a plethora of indirect taxes. Besides that, all other essential commodities will fall under 5% tax bracket, down from originally proposed 6%. However, there could be an effect on services that make up 30% of CPI. Also, there would be some impact on the wholesale price index inflation because it has industrial goods as a major component.
Luxury Cars and SUVs don’t get cheaper:
- Luxury cars and big SUVs will not be cheaper with the realization of GST.
- Though the crest rate of 28% under GST is lower than the taxes that bigger cars currently pay, the additional cess will hike up the prices
- Experts say that the level of tax on smaller cars will have to be at a disparity to the sedans.
- India is a principally small-car market because of the taxation structure and excise duty.
- Currently, a small car evokes 12.5% excise duty.
- Highest excise of 30% is imposed on multi utility vehicles (MUVs) and SUVs.
- In addition to excise, vehicles also attract value-added tax and road tax at the state level that are higher on sedans, SUVs and luxury cars.
How will GST affect the Stock Portfolios?
Market insight on the impact of the Goods and Services Tax (GST) is expected to see a marked shift after the government announced a four-tier rate structure on Thursday. Market participants are likely to see the GST as a vital tax reform, rather than a demand booster for many consumer elective products.
The new structure is likely to bring efficiency gains, lower logistics costs and higher compliance for companies which operate in largely unorganized sectors.
Besides these key sectors, there are some prominent companies which would gain amply from the four-tier structure of GST. To name some, Exide Industries, Crompton Greaves, Bata India, PVR, Supreme Industries, Greenply, Symphony, and Cera will remain the Beneficiaries. These companies operate in the sectors with a large number of unorganized players.
In the End:
GST is common man friendly since 50% of the items of CPI basket would be zero-rated. The structure has also balanced the rates by reducing the rate on essential goods from 6 percent to 5 percent and increasing the rate of tax on demerit goods from 26 percent to 28 percent.
Services could become more expensive but also be providing room for more input tax credit on inward supplies of goods. There are many details yet that still need debate. For example, how will the rates be divided between the Central GST and the State GST? What will be the rate of IGST (Inter-state GST)? Will the states be given litheness to vary some GST rates? These are questions that will be answered in due course.
Services could become more expensive but also providing room for more input tax credit on inward supplies of goods. There are many details yet that still need debate. For example, how will the rates be divided between the Central GST and the State GST? What will be the rate of IGST (Inter-state GST)? Will the states be given litheness to vary some GST rates? These are questions that will be answered in due course.
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