The old state luxury tax has been subsumed under the new GST system. Many luxury goods and services are still taxed at higher rates than essential items, but they aren’t assessed an actual luxury tax. These items just fall into the GST’s top tax slab.
The Purpose of the Luxury Tax
The luxury tax is designed to shift sales tax liability to middle- and upper-income consumers of relatively luxurious goods. This allows the government to assess lower tax rates on essential goods and services that all people are likely to consume.
The Top Tax Slab
Under the GST, the top tax rate is 28 percent. Originally, the Goods and Services Tax Council placed many goods and services into this category. but eventually reconsidered, pared the list down to 50 items, and lowered taxes on 178 items. Prior to this, a luxury tax was levied on most of those items, so the changes have the potential to lower consumer costs.
Items moved down to the 18-percent tax slab include cosmetics, cell phone batteries, granite slabs, and musical instruments, among others. Molasses, paint, sunscreen, motorcycles, and automobiles, among others, stayed in the 28-percent tax slab. In addition, this top slab also includes services such as race club betting and cinema.
Selling Goods and Services in the Top Tax Slab
If you sell items or services that fall into the top tax slab, you need to ensure you’re calculating and collecting the GST correctly. If you have the base price of a good or service, you can find out the GST just by multiplying the price by 0.28. For instance, if an item’s base price is ₹100, it’s GST is ₹28. That’s 100 x 0.28.
Alternatively, when you have the total price of a good or service, you can find out the base price by dividing the total price by 1.28. Then, you subtract that number from the total, and the remainder is the GST. Let’s say the total price is ₹256. Dividing that by 1.28 leads to ₹200. That is your base price, and when you subtract that from ₹256, you have the 28-percent GST of ₹56.
At the same time, you should also make sure that none of the goods or services you offer have fallen into lower tax brackets. At the time of writing, the GST council is still holding meetings, so more changes are a possibility.
Business Entertainment and the Top Tax Slab
If you do a lot of travelling for business, you may also want to pay attention to how the new rates affect your hotel rates. Similarly, if you like to entertain clients over meals, you may also want to look at the taxes for dining out. The 28-percent tax applies to restaurants in five and seven-star hotels. Hotel rooms with rates over ₹7,500 also face the higher tax rate.
To keep your GST liability as low as possible, you may need to choose less expensive restaurants and hotels. Hotels with tariffs between 2,500 and 7,500 are in the 18-percent tax slab, helping you to save a bit. The 12-percent rate applies to hotels with tariffs between ₹1,000 and ₹2,500, while hotels with tariffs less than ₹1,000 only have 5-percent GST.
That said, if you pay GST on a legitimate business expense, you can claim an input credit against the GST you owe. That’s why it’s critical to save your receipts.
Dealing with accounting in general can be hard work, but with the new GST system, tracking numbers and staying compliant is even more confusing than usual. To get help, consider using a solution such as QuickBooks. This cloud-based accounting software can help you create invoices, generate reports, and keep track of your finances.