GST rollout may not be rosy

Apart from finalising a few rules, the recent meeting of the Goods and Services Tax Council held in Srinagar ended with the announcement of the GST tariff for most goods and services. Last year, the Council had come to an agreement on five rates of GST — 0%, 5%, 12%, 18% and 28%.

The transition to GST provided an excellent opportunity to the lawmakers to substantially shorten the Central excise tariff and fit the shortened tariff into the above five rates. A simple method to do so would have been to fix the GST rates on the chapter headings instead of going into the detailed contents of each chapter.

Like in most other things, in the GST law, the makers of the law have decided to use existing laws as the foundation on which to frame GST instead of thinking afresh. In fact, they have made it even more exhaustive and complicated by adding a list of more than 500 services classified into about 100 groups.

The tax rates announced have generally pleased most people since essential items like sugar, edible oil, normal tea and coffee attract a GST rate of 5% while other items like cereals and jaggery have been exempted. Hair oil, toothpaste and soaps will be taxed at 18% — significantly lower than the present effective rate of 28%. The Council was unable to come to an agreement on the rates of taxes for two highly sensitive sectors — gold and textiles.

While there was a general expectation that the tax rate on services would be 18%, the Council has allocated services among the four main rates of taxes. It is apparent that it has decided the rates on three criteria — extremely sensitive items, not so sensitive items and certainly not so sensitive items.

Extremely sensitive items have been placed in the 0% and 5% brackets, not so sensitive items in the 12% bracket and luxury items in the 28% bracket. All items of goods and services that have not found a place in the above three brackets automatically came in the 18% bracket. The above observation is apparent if we look at the entries in Chapter 90.

Hearing aids are taxed at 0%, coronary stents at 5%, spectacle lenses at 12% and goggles (other than corrective) at 28%. Since frames and mountings for spectacles, corrective goggles or the like and parts thereof did not meet the requirements of the above three rates, they were placed in the 18% category.

There was a genuine concern in many quarters that high GST rates would lead to inflationary pressure. Inflation is usually a result of demand and supply and a high tax rate could curtail demand and also reduce supply. However, studies have proved that tax rates alone would not contribute much to inflation. Tax rates combined with other regulatory actions such as interest rate and monetary policies could have a spiralling effect on inflation in certain sectors.

The Reserve Bank of India (RBI) could be looking at the impact that GST rates could have on certain sensitive sectors so they can tailor their monetary policy accordingly. Even otherwise, GST would have a small impact on inflation due to the fact that the general rate of tax on services and a number of goods is 18% and the input tax credit scheme under GST puts artificial restrictions on seamless availing of credit.

Sensitive sectors

While the government has done well to protect sensitive sectors such as agriculture, healthcare and education, they should keep a watch on other equally sensitive sectors such as jewellery, textiles and infrastructure to ensure that the GST rates do not impact the sectors much. An uncomfortable rate for gold is going to only further encourage smuggling, one for textiles is going to have a direct impact on inflation while the one for infrastructure could add to the bad debts of banks.

Many a time, industry resorts to “reactionary inflation” — creating an artificial shortage in goods in expectation of a negative tax policy from the government. The revenue secretary of the Ministry of Finance has stated that their internal estimates indicate a 2% fall post GST. While this seems good to hear, it would have had the desired effect had the basis for their estimates been revealed. The government may appear confident of containing inflation due to the anti-profiteering provisions in the GST law. However, it has to be stated that anti-profiteering as a concept is new to India and will take time to have an impact on prices on the ground.

There can be no two thoughts on the fact that the GST tariffs for both goods and services need a relook. The GST Council must realise that a long tariff list does not necessarily mean a good tariff list. As a first step towards simplifying the GST tariff, the Council should stick to chapter headings and not get into minute details of each chapter. Is it really necessary for the government to pick and choose “food preparations of flour, groats, meal, starch or malt extract, not containing cocoa or containing less than 40% by weight of cocoa calculated on a totally defatted basis, not elsewhere specified or included” and tax it at 28%?

Assuming for a moment that the government does want to revel in such minute detail, how is the tax officer going to know that the food preparation does not contain cocoa or containing less than 40% by weight of cocoa calculated on a totally defatted basis?

Ideally, one would have thought that the first couple of years in the GST era would be devoted to comprehending the law and complying with it. The GST litigation would commence after a couple of years. The GST tariff classification ensures that the above expectation is unrealistic — litigation would commence from the day GST is rolled out. In short, the more one expects changes in GST, the more things remain the same.

(The writer is a tax expert based in Bengaluru)