DNA Explainer: Why GST rate changes have been done and its impact

The 47th meeting of the Goods and Services Tax (GST) Council was held recently in which many important decisions were taken related to taxation and many changes have been made in tax slabs. There has also been a withdrawal of certain tax exemptions. Some of them can directly affect consumers at the most basic level. 

GST exemption has been withdrawn from pre-packaged and labelled retail packs including food items such as curd, lassi, puffed rice, wheat flour, buttermilk. But items sold loose or unlabelled shall continue to remain exempt. The rate changes will be effective July 18.

Read | GST council to abolish tax exemption on some items, here's what will change

GST Council recommendations of four ministerial panels

The Goods and Services Tax (GST) Council discussed recommendations of four ministerial panels. This included rate rationalisation on movement of gold and precious stones, system reforms and casinos, horse racing and online gaming.

1. Correction of inverted duty structure and withdrawal of exemptions. The GoM has been given a three-month extension to further work on tax slabs changes and rate rationalisation.

2. The GoM on casinos, horse racing and lottery finalised a uniform 28% tax on all three categories, but now has been given more time of 15 days to review its recommendations that will then be taken up in the next GST Council meeting, which is likely to be held in first week of August at Madurai.

3. The GoM on system reforms has suggested extra measures for physical verification at the time of registration for high-risk taxpayers including biometric authentication, geo-tagging, use of electricity data and real-time monitoring of bank accounts.

4. Mandatory generation of e-way bills by states for intra-state transportation of gold and precious stones with minimum threshold of Rs 2 lakh was also approved.

Changes announced by the GST Council

Rate hike for household items like LED lamps, printing/drawing ink, power driven pumps, Tetra Pak to 18% from 12%.

Rate hike for solar water heaters and finished leather to 12% from 5%.

For cut and polished diamonds, the rate hike will be 1.5% from 0.25%.

Among services, 18% GST will be levied for issue of cheques, loose or in book form.

No exemptions for pre-packaged and pre-labelled food items like grains, curd, lassi, paneer, jaggery, wheat flour, puffed rice, buttermilk and meat/fish (except fresh and frozen).

Such food items will now be taxed at 5%, at par with branded items.

Further, refund of accumulated input tax credit will not be allowed on goods such as edible oil and coal.

Maps and charts including atlases will attract a 12% GST.

A 12% GST will now be levied on hotel rooms with rent up to Rs 1,000 a day.

A 5% GST will be levied on hospital room rent above Rs 5,000 per day (excluding ICU). 

GST rate has been cut for ostomy/ orthopaedic appliances from 12% to 5%.

Transport of goods and passengers by ropeways has been reduced from 18% to 5% (with input tax credit).

Services such as work contracts for roads, bridges, railways, metro, effluent treatment plants and crematoriums will now attract up to 18% from the current 12%.

Electric vehicles whether or not fitted with a battery pack, are eligible for the concessional GST rate of 5%.

Goods that are unpacked, unlabelled and unbranded will continue to remain exempt from GST.

Why have the rate changes been done?

Since the GST was introduced in July 2017, several rate revisions have been undertaken affecting the revenue stream which got worsened by the Covid-19 pandemic. Now through these compliance measures and rate changes, the Council expects to yield Rs 15,000 crore revenue in a year.

Finance Minister Nirmala Sitharaman explained that the proposed GST rate rationalisation was required for restoring revenue neutrality in the shift to GST from the previous indirect tax regime five years ago. 

Further GST rate rationalisation is very much on the Council's table. It is one thing for technology to correct any anomaly or a kind of inefficiency which will have a positive bearing on revenue collections, but the decline in the revenue-neutral rate requires a correction, Sitharaman said. 

Online traders will now be treated on par with offline traders for GST registration requirements with respect to intra-state trade. 

Rate rationalisation measures also assume significance given that the guaranteed compensation mechanism to states for five years for revenue losses arising due to GST implementation ended in June and the Council did not take any decision to extend it despite at least a dozen states asking for its extension.

FM Nirmala Sitharaman also explained that correction of duty inversions was needed to usher in investments across the value chain. The Council also cleared several measures to prevent fraudulent entities from getting GST registration.