Understanding Goods and Services Tax – III: the GST rate structure

Four tier GST rate structure

The GST Council, which is a constitutional body created to design and implement the new tax system has several historical responsibilities. It has to decide the central and state taxes that are to be merged under GST, the different tax rates that are to be adopted under the GST system, fixing the tax rates for the various goods and services etc.

Once the taxes that are to be merged under the GST is decided, the Council must decide the two other important decisions:

(1) selection of the GST rates

(2) fixing the tax rates for different goods and services.

Selection of the GST rates

What is the importance of the GST rates? We know GST is the merger of several existing taxes including the most important Union Excise Duties (UED) and the State Sales Tax (VAT). In the case of Union Excise Duties, there were three important tax rates 8%, 16% and 24% charged on different commodities in accordance with their necessity/luxury tag. Some commodities were having zero taxes. In the case of State Sales Tax, 1%,5%, 14% and 22.5% were the common tax rates across states.

It can be easily observable that the sum of the existing taxes – the UED and State VAT on different commodities can give a guideline for selecting the GST rates as well. 

For example, imagine that the UED on ACs is 14% and the sales tax rate on them is 12%. Then it is logical to conclude that the GST rates on ACs can be somewhere near to 26%. Lifesaving drugs have zero taxes under UED and State VAT, necessities have low taxes, consumer durables have an average level tax and the luxuries have high level taxes. In this way, we have to decide the GST rates.

While selecting the rates, the concept of standard rate is very important. It is the rate at which most of the commodities are taxed. The standard GST rate thus reflects the average burden of GST on the Indian consumers. Picking this standard GST rate is the most important work.

Several factors have to be considered while selecting the different GST rates and putting these rate on different types of goods and services.

Firstly, the total tax revenue from GST should be enough to match the revenues from the merged taxes (including the UED, State VAT, service taxes etc.). If tax revenue from GST is shorter than the previous merged taxes especially that for the state taxes, the centre should give compensation to them. This will be a fiscal burden for the centre. Hence tax revenue loss should not happen or the GST rate should be revenue neutral at least.

Secondly, if the tax rates are high, it may lead to inflation. Similarly, high tax rate may encourage entities to evade taxes.

Thirdly, economic activities should not be discouraged out of taxation. Considering all these factors, the GST Council brought out a four-tier tax structure for GST.

Four tier GST rate

The GST Council selected a four tiered GST rate – 5%, 12%, 18% and 28%. It is easily observable that the middle tax rates; that is the rates of 12% and 18% can function as standard rates. Most of the commodities and services can be taxed at these rates. The 5% rate can be imposed on essential items whereas the 28% rate can be imposed on luxury items.

In addition to these rates, a tax rate of nil, 0.25% and 3% were also adopted for few selected commodities. Sin taxes or taxes above 28% were imposed on selected luxuries to compensate the elimination of cess.

Fixing the rates for goods and services

Once the rates are selected, the next big duty of the Council is to decide the GST rate on different goods and services. Here, the GST Council decided rates for the total of 1211 commodities and around 600 services in its various meetings. Even after selecting rates and commodities, the Council on June 11, revised rates on 66 items. This type of revisions can be expected in near future as well till a refined rate structure across different goods and services is reached.

The Council applied the already set 5%, 12%, 18% and 28% rates for different goods and services.

In the case of goods, essentials including milk and food grains are taxed zero. Next commodity group is the one attracting 5% tax rate and it includes items like coffee, tea etc.

The 12% category consists of mainly day to day consumer goods items. Consumer durables mostly attracts the 18% GST rate. Items like five alcohols, cigarette, shampoo, ceramic tiles etc. attracts the highest 28% rate.

In addition to these, a 0.25% rate is imposed on rough precious and semi-precious stones. Gold will have a unique rate of 3% and this rate was reached after long deliberations.

In the case of services, the previous rate was a uniform 15% and now services are taxed at nil, 5%, 12%, 18% and 28% in accordance with their necessity/luxury nature.

Sl No.

GST rate (%)

Percentage of total commodities covered

Main items

1.

0

7%

Milk, Food grain, Bread, Printed Books etc.

2.

5

14%

Sugar, Coffee, Tea, building bricks, spare parts etc.

3.

12

17%

Medicines, Telephones, LED lights, Fruit Juices etc.

4.

18

43%

Soap, Tootphasee, Steel etc.

5.

28

19%

Motor Cars, Cement, Consumer Durables etc.

Source: PWC, Tax Insights, May 20, 2017.

Above table shows the importance of various rates. Almost 60% of the GST revenues comes from the two middle rates of 18% and 12%; with the 18% rate functioning the key role (43% commodities have the 18% tax rate). As in the case of other countries, exports are exempted from GST.

Other Class Room Topics on Understanding GST:

Understanding GST – I

http://www.indianeconomy.net/splclassroom/398/understanding-goods-and-services-tax-gst-i/ 

Understanding GST – II

http://www.indianeconomy.net/splclassroom/399/understanding-goods-and-services-tax-gst-ii/ 

Understanding GST – IV: the GST Infrastructure

http://www.indianeconomy.net/splclassroom/403/understanding-gst-iv-the-gst-infrastructure/  

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