Published Editorial

Will 18% be the goldilocks rate for GST?

August 2016

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Abhishek Jain

Tax Partner, EY India

The Constitutional Amendment Bill allowing the central and state governments to impose goods and services tax (GST) has dropped the imposition of 1% additional tax and addressed the issue of providing a separate resolution mechanism for disputes among central and state governments. In this backdrop, the debate now turns to on what the rate of GST should be.

There appears to be a lack of consensus on the rate of GST as there are divergent views by state governments on accepting the GST rate at 18%.

Assuming that the government caps the rate at 18% barring certain slabs, the same would result in a positive impact for companies in the manufacturing sector involving retail and consumer products, automobiles, industrial items, etc. Any attempt to tax pharma at 18% compared to the current classification of the products under essential commodities attracting a lower rate of tax could result in a negative impact for the industry. Also, attempt has already been made in the model draft GST Bill to address the issue of accumulated credit arising on account of inverted duty structure, which could be a big positive for the sector as a whole.

The treatment of works contracts and services provided by hospitality companies as services seem to result in clarity on the taxes to be applied besides reducing the impact of overall taxes, excepting certain services like hotel accommodation, etc. Real estate is one sector where the impact is still to be ascertained in view of the treatment it would get in terms of the rate / exemptions / abatements, etc. A uniform rate of 18% without any abatements / exemptions and not subsuming stamp duty could result in a negative impact for the industry as the current effective indirect tax rate (excluding stamp duty) is much less than 10%.

While products such as petroleum and alcohol are currently kept out of GST, it is necessary for the government to decide as to when they could move within GST so that the cascading effect of taxes can be completely eliminated in the indirect taxes. Administering dual taxes is not only difficult from a government perspective, keeping certain goods like petroleum products out of GST also increases procurement cost for various manufacturing entities.

At present, most services are liable to service tax at the rate of 15% (including the recently introduced Swachch Bharat Cess and Krishi Kalyan Cess). Considering that the rate of tax for services could be in the range of 18% to 20% under the GST, the consumer may have to bear the brunt of the increased tax rate for services including telecom, banking and financial services and logistics. Further, even in respect of e-commerce transactions, prices could increase marginally.

On the other hand, certain other services offerings such as those of the media and entertainment sector, at present liable to entertainment tax in addition to service tax, could be marginally cheaper for the consumer as both these levies would be replaced by a single GST.

Also, the present ambiguity on treatment of intangibles as goods or services and the consequent levy of both VAT and service tax results into increased tax costs. Under GST, such ambiguities are likely to be put to rest, resulting in lower incidence of tax on consumers of intangibles including software, which should be a relief for companies operating in these sectors.

Introduction of GST would be a mixed bag for the consumers but if this tax reform is correctly implemented and is mindful of the key objectives of reducing cascading impact of cases, ease in doing business and creation of single national market, it could usher in sustainable development in India.