GST: It's a distorted rate structure, say tax experts

The goods and services tax (GST) rate structure approved by the state and central finance ministers through consensus on Thursday was not a perfect one but it was doable one for now, said most tax experts.

Pratik Jain, partner and leader indirect tax, PwC, said while multiple rate structure was not in line with classical GST system, this seemed to be "the only practical solution as of now".
His colleague Anita Rastogi also felt that levy of cess distorted the GST; "the levy of cess could have been avoided as it is a clear distortion to the GST scheme".

She said the cess, along with the green energy cess, would be an additional tax burden on some of the products.

Most analysts would now keenly watch on how the goods are classified and under which rate bracket they would be put.

Jain said the government should watch out against broad-basing the 28% slab to rein in any inflationary impact of the rate structure.

"Having large proportion of items of mass consumption exempt and remaining under 5% the government is hoping to keep the inflation in check. However, it is important that 5% and 28% categories only covers select few products. Specifically, 28% slab should not be broad-based to cover more products than what has been indicated so far," he said in the statement.

M S Mani, senior director, Deloitte Haskins & Sells LLP, suggested that majority of the manufactured goods should be kept in the 18%.

"It is also necessary to ensure that majority of manufactured products are kept at 18 % and the temptation to push more products into the 28% slab should be resisted, " he said.

Mani also felt that a proper fitment of product based on current usage pattern was "essential"; "this is due to the fact that products viewed as non-essentials or luxury in the past are in many cases viewed as necessities now ".

Prashant Deshpande, partner, Deloitte Haskins & Sells LLP, hoped that the GST Council would come out with a single rate structure for services.

He said while lowering of the rate on common use items from expected 6% to 5% was in the interests of common man, it would be interesting to see what the government deemed as common use items.

Deshpande also felt that uncertainty on rates for gold was "not warranted" as it was a key determinant of the rate structure.

Naushad Forbes, president, Confederation of Indian Industry (CII), believes the multiple rate structure should converge to one or two rates over time.

"GST rates structure can be an absolute limit of four rates as suggested by the Government, and over time, the Government should commit to converge to one or two rates," he said.

Even the CII chief felt that a bulk of the goods services should fall within standard rate of 18%, and only as an exception they should go to the higher rate of 28%.

Forbes called for the cess to be levied only on the final product and the total tax on demerit and luxury goods to be kept within the existing tax rates.

Rajeev Dimri, leader, Indirect Tax, BMR & Associates LLP welcomed the zero rating of necessities but said actual benefit to the consumer would depend on the items included in this category.

"Limiting the zero rating to food grains or agri-products may not lead to any significant reduction on tax costs for the consumers," he said. "Lower rate of 5 per cent for items of mass consumption along with zero rated tax structure for essential commodities would make GST less regressive and pocket-friendly for common man," he said.

Also, tax costs might even go down for commodities to be taxed at 5% provided the credits on procurements are fully allowed.