Economic Highlights
New Delhi, 27 March, 2017
GST Benefit
PIPEDREAM, MANY TAXES
By Shivaji Sarkar
As preparations for GST roll out begins, indirect taxes are
likely to come down. In reality, however, the GST will not be one tax but a
combination of many taxes and cess. The rates also will not be one. The GST
Council has decided on a four-slab structure – 5, 12, 18 and 28 per cent. In
addition there will be an additional cess of 12 to 15 per cent on luxury and
sin goods, including luxury cars!
Finance Minister, who is also the Chairman of the GST
Council states: “The cap on cess on demerit goods on top of peak rate of GST
has been kept at 15 per cent, but effectively it will be only 12 per cent”. The
GST is said to bring uniformity in taxes across States. But the definition of
demerit goods leaves a wide chasm. Sin tax is to be levied on goods such a tobacco
and alcohol.
Current taxes like excise duties, service tax, custom duty
etc will be merged under Central GST (CGST). Taxes like sales tax, entertainment
tax, VAT and other State taxes will be included in State GST (SGST) and
inter-state deals under Integrated GST. A compensation draft law to enable the
Centre to compensate the losses for the first five years is also on the anvil. But
it would not include the basic lifeline – petroleum products, which is likely
to leave a wide window for the States and Centre.
In short indirect taxes would be around 40 per cent and on
petroleum type products, not covered by GST, taxes are likely to go up. For
instance, Uttar Pradesh is planning to hike it by 5 per cent more as it plans
to waive farms loans worth about Rs 27,000 crore. The same may happen in other States
as well since the window for levying taxes comes down. Petroleum products may
have higher levies in some States. This is likely to add to inflation when the
crude prices are coming down.
The Government has decided to abolish 16 cesses that bring
Rs 65,000 crore revenue in its preparation for the GST roll out. This includes krishi vikas and swachh bharat cesses. While this may give the impression that tax
burden would reduce, in reality, it may not be so. New laws have enough
provision to maintain the rates near the high current level to “neutralise the
losses to the States and the Centre”.
GST is collected on value-added goods and services at each
stage of sale or purchase in the supply chain. The GST paid on procurement of
goods and services can be set off against that payable on the supply of goods
or services. The manufacturer or wholesaler or retailer will pay the applicable
GST rate but will claim back through tax credit mechanism. It is a
consumption-based tax targeting the “destination”-- the final consumer. So
whatever the levies, at whatever stage, it would finally burden the common man.
The entire impact is not easy to estimate.
Multiplicity of taxes may add to the problem of traders and
industry. Finally, the rates on individual goods may not be one. If goods are
traded from one State to another the provision of inter-State tax under IGST
can end up having different prices at different places.
Add to this the various tolls that local bodies impose. This
could make it more complicated. The industry is apprehensive that the
uniformity that was supposed to be the base of GST may not be its strength.
Different cess has been proposed on cigarettes, tobacco
products under the GST regime above the highest rate of 28 per cent. Cigarettes,
currently taxed at 53 per cent, would attract a cess rate of 15 per cent. But
if the cess rate of 15 per cent each is levied by the Centre and State and say
there is also one per cent IGST, the total taxes would be around 28 plus 60
plus one per cent, that is 89 per cent!
The basic principle is to have taxes at the current level.
So, if the current rate of taxation on a product is higher than the GST rate,
the cess will make up the difference. At the moment, the Government levies a
different rate of tax on items such as luxury cars, high-end watches apart from
tobacco.
The highest proposed tax slab is likely to be equal to the
difference between current tax incidence and the highest tax slab along with a
cess. This means that there will be a separate cess on each of these items. It
is likely to complicate the GST tax structure. Even gold is likely to have a
tax of 4 per cent. If there are six different cesses, it means 10 different
rates of GST.
Add to this that taxation on cars and automobiles is likely
to be more complicated at State levels. The GST was aimed at having a uniform
rate. Even now the NCR regions have different rates in Haryana, Delhi and UP. This will continue.
Non-luxury cars are virtually non-existent. Except 800 or below 1000 cc every
vehicle is a luxury - a queer socialistic definition in a market-oriented
economy. If there is a separate cess on petrol cars above 1200 cc and diesel
cars – another quixotic idea – there may be more than four cesses for cars
alone.
According to the Government’s own calculations, told to the Council,
the proposed GST structure would bring down prices of paan, tobacco and
intoxicants by 0.22 per cent. The category has a two per cent weightage in the
consumer price index.
The cesses are supposed to be removed after five years – the
period States are supposed to be compensated for losses. But this country does
not have a good record on removing the cesses. The lure of having more revenue
also impacts decision making. One good aspect is that it allows business to
take credit on taxes, a new concept. This is aimed at reducing the burden, but
all the same complicates book keeping.
Another aspect concerns small traders. Many goods are now
not under the tax net. After the multi-level GST, the exemption list would have
few items. The impact will be felt by the consumer as he would have to shell
more. It is not clear whether over 25 per cent taxes a consumer pays at
restaurants would at all come down. At the end, the consumer may not get any
relief. Rather, he may have to pay a higher price for almost every good.--INFA
(Copyright, India
News and Feature Alliance)
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