Finalising rates: a series of twists and turns

Racing against time to meet the July 1 deadline for GST rollout, when Finance Minister Arun Jaitley presented the last bit of four enabling GST laws for Parliament’s approval on March 27, the Opposition first desisted from discussion and called it a “midnight listing” by the government without any prior information.

But Jaitley emphasised that the bills had to be passed in the Budget session itself or else the Centre and states would lose their right to collect indirect taxes after September 15. The Opposition was reined in and the bills were passed. Today, the country is almost ready to roll out India’s biggest indirect tax reform since independence.

Parliament's approval was needed in the Budget session itself because only after that the fitment of rates of all commodities and services under the four-tier rate structure, decided earlier, could begin. The journey in the last two months was full of twists and turns, agreements and disagreements, give and take between the Centre and the states.

At every stage, there had to be compromises because the states did not want to lose revenue and the Centre was reluctant to dilute its financial powers. Then, there was the issue of bringing states ruled by different political parties to one platform.

First, the Centre wanted a four-slab tax structure beginning with the lowest at 6% and the highest at 26% The slabs proposed were 6, 12, 18 and 26%. Food items were exempted to keep inflation in check. Then came the tricky issue of cess. The Centre wanted cess for luxury goods like fancy cars, cigarettes and soft drinks over and above the 26%.

A majority of the states were against the proposal because the spirit of GST, they said, was a cess-less regime and simplification of the tax structure. Cess was also opposed because its entire proceeds was meant to be kept with the Centre and not shared with the states.

Andhra Pradesh Finance Minister Yanamala Ramakrishnudu went ahead to say the compensation should be handed out from the Consolidated Fund of India only. Others said they did not mind having a bit higher GST rates but were opposed to cess. Finally, a deal was struck for a higher rate slab of 5%, 12%, 18% and 28% but the Centre’s proposal for cess still remained, in some cases, as high as 15%.

Then came fitment of rates. A special committee was set up for that. It went into intense negotiations with states on commodities. It was decided to keep food items at zero rate to keep inflation under check. Other consumer items (like FMCG) were to be kept at a bit higher rate.

No easy task

A fresh problem occurred with categorisation of items. For instance, whether to treat coconut oil as hair oil or edible oil. Kerala and other southern states use coconut oil as edible oil. In that case, the rate had to be zero.

Dabur Lal oil, which is used for medicinal purposes so as Vicks. Borosoft which is a cosmetic but mostly used as an ointment. Chocolates had to be taxed at a high rate but biscuits were among items of mass consumption and had to be kept zero rated. But Kitkat, a famous Nestle brand chocolate, was originally categorised as biscuit.

Jaitley once said reaching to a consensus for with ministers of 31 different states, not always from allied parties, was never an easy task. However, not a single decision in the GST Council has been taken without consensus.

The Council has so far met 14 times and decided on tax rates of 1,211 goods and services but fitment process is still not complete. Rates of precious items like gold and diamond, textiles, footwear, beedi and agricultural implements are yet to be decided. The committee of GST officials have had rounds of internal discussion on tax rates of these items before the next Council meeting on June 3.

Informed sources say there are differences of opinion between states and Centre on all these items. While Kerala wants to cap gold rate 5%, most of jewellery manufacturing states like Tamil Nadu, Maharashtra and Gujarat want a lower rate. Suggestions have come to levy a cess on gold and beedi. But gold is sensitive item and a higher tax could lead to more smuggling. Footwear industry too wants a rate on par with apparel under GST. While VAT for footwear across the country averages at about 14%, for apparel it is only 5%.

The Council, in its last meeting, finalised a four-slab rate structure for services as well but a major bone of contention – of lottery tickets - is remaining. The scope of GST has been widened to tax lottery tickets.