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Four-tier GST Structure in 6% – 26% Proposed

The GST Council finalised the compensation formula for states for potential revenue loss on the assumption of 14 per cent revenue growth rate over the base year of 2015-16

A four-tier structure for Goods and Services Tax (GST) comprises of a lower rate of 6 per cent, two standard rates of 12 per cent and 18 per cent, and a higher rate of 26 per cent with an additional cess for luxury and demerit goods were proposed in the third meeting of the GST Council on 18 Oct.

The higher rate for services is proposed at 18 per cent, while essential services such as transportation are proposed to be taxed at 6 per cent or 12 per cent.

Around 70 per cent of the taxable base is proposed to be taxed at either 18 per cent, 12 per cent or 6 per cent, with more than 50 per cent of the items to be taxed at 12 per cent or 18 per cent. Ultra-luxury items like high-end cars and demerit goods like tobacco, cigarettes, pan masala and aerated drinks, comprising about 25 per cent of the taxable base, would attract an additional cess over and above the higher rate of 26 per cent, Revenue Secretary Hasmukh Adhia told reporters after the meeting.

Gold is proposed to be taxed at 4 per cent.

Cess Proposed

The collections from the proposed cess on luxury or demerit supplies over and above the higher tax slab are estimated to be around Rs 50,000 crore, out of which around Rs 26,000 crore will be collected through clean environment cess, Adhia said, adding that the cess collections will be exclusively used by the Centre to compensate states.

Proposed Rate Structure

	Proposed GST Rates	Present Rate Structure Merging into GST Rates
Lower Rate	6%	>=3% to <9%
Standard 1 Rate	12%	>=9% to <15%
Standard 2 Rate	18%	>=15% to <21%
High Rate	26%	>=21%

In its presentation at the meeting of the GST Council, which is headed by Finance Minister Arun Jaitley and has representatives of all states, it was said that the total impact of the proposed rate structure on Consumer Price Index (CPI)-based inflation rate will be (-) 0.06 per cent.

Under the proposed GST rate structure, the inflation impact on constituents of CPI such as health services, fuel and lighting and clothing is estimated to be 0.56 per cent, 0.05 per cent and 0.23 per cent, respectively, while for transport it is estimated at (-) 0.65 per cent, education at (-) 0.08 per cent and housing at (-) 0.09 per cent.

Total revenue collection under the proposed GST structure is estimated at Rs 8.72 lakh crore (based on 2015-16 estimates).

The discussions on the rate structure will now continue and after an agreement is reached, a technical group of officials will decide the tax slab for each item. A senior Finance Ministry official said the rationale behind the proposed rate structure is to ensure that the tax incidence is not higher than the existing rates of excise, value added tax and other levies.

However, some States held a different view on the rate structure. “Worst fears confirmed- GST to be regressive. Tax on luxuries to be reduced to 26 per cent and on necessities to be raised to 12 per cent,” said Kerala Finance Minister Thomas Isaac, adding that the proposal for cess contradicts the original concept paper for GST.

Jaitley said the issue of cross empowerment of the Centre and State tax officials on the existing 11 lakh service tax assessees will be taken up after a decision on rates.

The Council reached a consensus that compensation to States for any revenue loss would be limited to the taxes subsumed under GST. Input tax credit given for intra-state transfers would be included in the definition of revenue, Jaitley said.

Further, the notional tax revenue arising out of exemptions to the North East and Hill States would also be included in revenue.

Jaitley, further said that a 14 per cent growth rate in revenue is projected using a base year of 2015-16.

The Centre hopes to roll out GST from April 1, 2017. Finance Minister Arun Jaitley, who chairs the GST Council, expects to finish all deliberations and finalise the modalities of the tax regime by November 22 so that the GST laws – Centre, State and integrated – can be passed in Parliament in the Winter Session, and by State Assemblies.

While the idea of varied tax rates has been floating around, consensus seems to be building around a standard rate of 16-18 per cent for services and about 20 per cent for goods. There could be one rate, of 4-6 per cent, for essential commodities, and a higher rate for demerit or ‘sin’ goods.