GST: Five things you need to know

Come July 1 and India will witness a new tax administration, which only happened 12 years ago when the Centre introduced the Value Added Tax (VAT) in India.

In its 14th GST Council meet, the rates for 1,211 goods and 36 broad categories of services have been decided with the exception of alcoholic beverages, petroleum products, footwear, textiles, gems and jewellery.

“Nearly 50 per cent of goods fall under the 18 per cent tax rate, About 14 per cent of goods fall under the 5 per cent tax rate, 17 per cent under the 12 per cent tax rate and 19 per cent under the 28 per cent tax rate.  In case of services, a majority of services come within the 18 per cent tax rate,” a report by Care Ratings analyst Madan Sabnavis said on May 25.

What will be different under GST?

Under the current tax regime, taxes on goods and services are levied by the Centre and the states. These taxes, though they don’t overlap, were governed by laws and had at least 17 different rates. GST, which is scheduled to roll out from July 1, will make the levying of tax simpler. It will have just four tax rates at 5 per cent, 12 per cent, 18 per cent and 28 per cent, along with a fifth bracket for goods that will be exempted from the GST ambit. “The GST regime will subsume the various laws and there will be a single tax law and four tax rates that will be charged by the Centre and across states,” Sabnavis said.

Will things get cheaper?

One of the most common questions lurking in everyone’s minds seems to be whether things will get cheaper. Well, yes, and no. The decision to lower the tax rates of goods has been made for only certain products. For instance, soaps, toothpaste, soups, hotel bookings and even economy class air travel is expected to become cheaper post GST, given that they will be brought to a lower tax bracket.

However, the decision of how much to reduce prices will rest solely with each company. “Corporates will pass on direct tax benefits; however, they will aim to retain partly indirect benefits from savings,” Ravi Adukia, a Nomura analyst said on May 22. Price cuts are determined on industry dynamics, rivalry and competition. So, GST will not be a major factor in bringing down prices.

What gets more expensive?

Starting with personal care products like hair dyes, shampoo, cosmetics, skin care, and perfumes which are currently taxed at 26 per cent will go up to 28 per cent under GST. Prices of aerated drinks are also expected to go up as they have been put under the highest GST bracket of 28 per cent. Business class air travel has moved to the 12 per cent tax bracket instead of 9 per cent currently. Movie tickets, rides at amusement parks, and even five-star hotel stays will be under the 28 per cent tax bracket. An additional cess levied on luxury goods like expensive cars, branded watches and harmful products or demerit goods like cigarettes, pan masala, and tobacco will likely increase the prices of these products.

How does GST impact businesses?

To remove the cascading effect of taxes, which is currently faced by businesses, GST will allow input tax credit claims at every stage of goods supply. This was not available earlier.

The cost of transportation and storage of goods or logistics cost is also expected to become more affordable as it has been brought under the 5 per cent GST rate instead of the current 15 per cent tax bracket. This should help businesses focus on delivery and better service of goods. To claim tax rebates, businesses will have to source goods from registered vendors. This will help streamline business efficiencies.

Will GST have an impact on inflation?

The goods in the Consumer Price Inflation basket will be severely impacted by the changing tax norms. “The tax rates on food and beverages, that has a nearly 46 per cent share in the Consumer Price Index, which is used to measure inflation at the retail level, is likely to reduce by 2-3 per cent on an average owing to reduction in tax rates on edible oils, sugar and confectionary, spices, non-alcoholic beverages and prepared meals,” the Care Ratings report said.