Determining the GST Tax Structure
The GST tax structure will bring about a drastic change in the current indirect tax system. Currently, tax barriers have created a fragmented Indian market. This has resulted in a cascading effect of taxes on cost making indigenous manufacture less profitable. Also, the complex multiple taxes have raised the cost of compliance considerably.
The GST tax structure will comprise of the Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST) and Integrated Goods and Service Tax (IGST). The four slab tiers of the GST tax structure will be 5 per cent, 12 per cent, 18 per cent and 28 per cent. The lowest rates will be applicable for essential items and the highest for luxury and demerit goods. Moreover, these include SUVs, luxury cars and tobacco products. GST may go up to 40 per cent after the GST Council proposed raising the peak rate.
Service tax will increase from its current levels of 14.5 per cent which will be negative for service industries like airlines, telecom and insurance. Currently, FMCGs pay about 24 to 25 per cent on excise duty, VAT and entry tax. Under the GST tax structure, this may be reduced to 18 per cent, but at 28 per cent this may disappoint the market. Also, telecom will be affected with a rate of 18 per cent from the current 15 per cent. An additional tax up to 1% will be levied on the inter-state supply of goods. Therefore, these goods do not come under VAT and have no input tax credit.
Central taxes to be absorbed under GST are:
- Central Excise Duty
- Additional Excise Duties
- Service Tax
- Additional Customs Duty (Countervailing Duty)
- Special Additional Duty of Customs – 4% (SAD)
- Central Surcharges and Cesses in the nature of taxes on goods/services like cess on rubber, tea, coffee and national calamity contingent duty
State taxes to be absorbed under GST are:
- State VAT/Sales tax
- Entertainment tax
- Luxury tax
- Taxes on lottery
- Betting and gambling
- Tax on advertisements
- State cesses
- Surcharges in the nature of taxes on goods/ services, Octroi and entry tax and purchase tax
Excise and service taxes will be replaced with CGST, Local VAT and other state taxes will be replaced with SGST. CST will be replaced with IGST. Therefore, IGST is the total of CGST and SGST.
Alcohol and tobacco will have a separate excise duty in addition to GST. Petroleum and petroleum products will continue to be taxed under existing laws and will be incorporated into GST at a future date.
GST has the potential to boost India’s GDP by as much as 2 per cent and has been considered an unprecedented reform in the history of modern global tax. Taxpayers will not have the burden of multiple compliances under various states. With the GST tax structure, there will be a single registration and single return. This will help build and expand upon the Make in India initiative by the Government of India by attracting FDI and reducing costs. Hence, these costs are manufacturing costs in the form of reduced compliance cost and taxes.
Similar to the GST law, the CGST, SGST and UTGST laws will be addressed and strengthened at the levels of the Centre, States and Union Territories. Hence, the centre will introduce the CGST Bill and SGST bill shortly in the Legislative Assemblies.
Central and State officials will determine which goods and services will fall in which tax brackets and will be carried forward to the GST Council for approval. Also, they will decide which goods and services would attract a cess on top of the peak rate. This will compensate states for any revenue lost due to the implementation of GST in the first five years. Moreover, the government intends to roll out GST from 1 July, 2017. Therefore, GST will help with removing trade barriers and facilitating the ease of doing business.