The GST council heard the pain points of the newly-implemented multi-rate tax system and decided to give the tax structure an overhaul. So, let’s look at the revision in detail.
Over 200 products, including 178 mass use items, are set to become pocket-friendly, including grooming products, cosmetics and chocolates. These products were originally in the 28% tax slab, but the reboot has bumped them down to the 18% tax slab. Only sin products such as aerated drinks and tobacco remain in the 28% bracket.
The fast-moving consumer good (FMCG) industry is the biggest beneficiary. Companies such as Hindustan Unilever, Dabur, Amul, Procter & Gamble and Nestle have promised to pass on the benefits to their customers by reducing prices.
Media reports estimate prices to drop by 5 to 15% on products that have benefitted from the overhaul.
The aviation sector is another such recipient. Tax on aircraft engines, seats and tyres have come down from 28% to 5%.
The GST reboot may have slashed rates on both AC and non-AC restaurants, but the bill you receive after the meal may not be as benevolent.
Previously, taxes on non-AC and AC eateries were 12% and 18% respectively. Now, the tax rate for both has been reduced to 5%.
However, the GST council has taken away the benefits of input tax credit (ITC). The ITC facility, introduced in the GST regime, helps reduce manufacturers’ (in this case eateries) tax liability. This is the reason why owners of restaurants are hesitant in reducing prices despite the reduction in tax rates. Many owners believe the lack of credit may increase operating costs and therefore may be even forced to increase prices by 10%.
The overhaul hasn’t altered the tax rate on five-star hotels (28%), while 18% tax slab remains applicable for hotels with room rent over Rs 7,500 and restaurants that provide outdoor catering.
Small and medium-sized enterprises received some love too, thanks to the revamp of the composition scheme (this scheme can be chosen by a taxpayer whose turnover is below Rs 1.5 crore and Rs 75 lakh in Northeast states and Himachal Pradesh).
Confusion over compliance was an unequivocal complaint among SMEs. But the GST council has assuaged their worries. Businesses with a turnover below Rs 1.5 crore can now file their returns quarterly rather than monthly. The alteration would reduce compliance costs and paperwork.
Also, smaller multi-state service providers were finding it difficult to comply with GST norms. But now, suppliers with a turnover below Rs 20 lakh need not register with the GST network even if they provide inter-state services. The turnover limit is Rs 10 lakh for special category states (the Northeast, Sikkkim, Uttarakhand and Himachal Pradesh), except Jammu & Kashmir.
Lowering of consumer goods may have side-effects though. It may affect the central government’s tax revenue. This has alarmed many experts who suggest the Centre may find it difficult to compensate the revenue loss to all the states.
Some policy advisors told the media that the Centre would have to hike tax rates on some of the products at a later date to be able to compensate states (the compensation amount may be as high as Rs 55,000 crore over the next five years, according to some media reports).
Last year, the Centre had pledged all state governments, especially the ‘producing’ states like Maharashtra and Karnataka, that they would compensate for their losses over the next five years. That’s because states earlier got a portion of the revenue generated from octroi, value added tax, entertainment and luxury tax. But, the introduction of GST subsumed all such taxes, prompting several states to demand compensation.
Although petroleum, real estate and utility sectors continue to operate outside the GST ambit, there is a possibility that the decision-making body may subsume them eventually. In fact, Jammu and Kashmir is set to become the first state in the country to bring these sectors under the GST purview.
Such a move can have an impact on the consumer price and the central government’s tax collection. For instance, bringing petroleum products under the GST can be a double-edged sword. While the government’s already-straining revenues will take a hit (the central government earns Rs 2.67 lakh crore from taxes on petroleum products), the consumer may benefit by seeing fuel prices go down.
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