Understanding Unclarified Aspects of GST Rates and Their Business Impact
The GST Council has finalized most tax rates, but several critical areas still require clarification for businesses. Key concerns include the status of existing state-level tax holidays for manufacturers, the proposed single tax rate for services, and the impact of changes to abatements and exemptions under the previous excise regime. While the Finance Minister assures no inflationary impact and a reduction in overall tax burden, further guidance from the GST Council is essential for a seamless transition.
The Goods and Services Tax (GST) Council has concluded its initial discussions on GST rates and tax slabs for goods and services. Although approximately 90% of items now have announced rates, several areas still require detailed clarification. This article outlines these categories and the specific clarifications that are eagerly awaited.
Tax Holiday Schemes
Many Indian states, such as Himachal Pradesh and Uttarakhand, have historically provided tax holidays and other incentives to manufacturers. Consequently, major Fast-Moving Consumer Goods (FMCG) companies like Nestle, ITC, Hindustan Unilever, Dabur, and Cadbury have established manufacturing facilities in these regions. These businesses are now seeking clear guidance regarding the continuation or adjustment of these tax holidays under the new GST regime. Discontinuing these benefits could lead to a significant increase in operational costs, potentially between 20-30% after GST implementation. While discussions about offering cash refunds to these companies, similar to the model followed in Jammu & Kashmir, are ongoing, no definitive decisions have been reached.
Diverse State-Specific Demands
Various states have unique tax holidays and benefit schemes tailored for specific local products. For instance, Uttar Pradesh is advocating for exemptions on items categorized as “puja samagri” (religious offerings), which are currently proposed to be taxed at 18%. Kerala, on the other hand, suggests a 5% tax rate on gold instead of the proposed 1%, arguing that gold is not an essential commodity. Several state finance ministers are also seeking exemptions for local products like silk yarn, cotton yarn, and handicraft items. To date, no specific clarifications have been issued concerning these diverse state-level demands.
Implications for Services
Initially, it was anticipated that services would be subject to two rates: 12% and 18%. However, recent reports suggest that a single service tax rate might be implemented. If an 18% rate is applied to services, the cost of various services is expected to increase, considering the current effective service tax rate stands at 15%. Furthermore, there have been no updates concerning abatements for services under the new GST framework.
Abatements and Exemptions in the Prior Tax System
Under the previous excise regime, manufacturers with an annual turnover below ₹1.5 crores were exempt from excise duty. This threshold has been reduced to ₹20 lakhs under GST. Additionally, small manufacturers previously benefited from numerous exemptions and abatements, which significantly lowered their effective tax rates. Abatements allowed for a reduction in taxable values.
Consider this illustration:
| Description | Amount (INR) |
|---|---|
| Value of the garment | 1000 |
| Less: Abatement (40%) | 400 |
| Taxable Value | 600 |
| Excise rate @2% | 12 |
In this scenario, for a garment valued at ₹1000, with a 40% excise abatement and a 2% excise rate, the effective tax rate was approximately 1.2% (₹12/₹1000 * 100), a considerable reduction from the nominal 12.5%. The GST Council has not yet provided updates for such cases. Under GST, tax will be levied on the transaction value, which could potentially lead to higher prices.
Many products, including mobile phones, refrigerators, soaps, and biscuits, benefited from abatements of up to 45%. These abatements typically excluded post-manufacturing value additions, such as marketing and post-removal transportation costs, from excise duty. Excise duty was applied solely to the ex-factory price. However, under the GST system, tax will be calculated based on the transaction value, which often corresponds to the Maximum Retail Price (MRP) of the product.
For example, if a product's ex-factory price is ₹100 and its MRP is ₹150. Assuming a nominal excise rate of 12.5% and a GST rate of 12%:
- Tax under excise: 12.5% of ₹100 = ₹12.5
- Tax under GST: 12% of ₹150 = ₹18.75
When compared to the GST transaction value, the effective excise rate in this example was 8% (₹12.5/₹150 × 100).
Finance Minister Mr. Jaitley has indicated that the GST implementation should not lead to inflationary impacts, noting that many items previously taxed at 31% have been moved to the 28% slab.
Concluding Remarks
Mr. Jaitley emphasized that the primary principle guiding GST rate fixation was to ensure that tax rates for commodities would not increase. He stated, “There is no increase. On many commodities, there is a reduction particularly because the cascading effect of tax is gone.” He further added, “Of several commodities, we have consciously brought down the tax. In the overall basket there would be a reduction, but we are banking on the hope that because of a more efficient system, evasion would be checked and tax buoyancy would go up. That despite reduction the revenue neutrality and tax buoyancy thereafter would be maintained.” The GST Council still needs to issue further clarifications on rates and various existing tax benefits to ensure a smooth transition for businesses migrating to the GST regime.