Council fixes 4-level GST rate structure; rates are 5, 12, 18 and 28. The four-slab structure announced yesterday (Thursday) envisages accommodating most essential items and mass consumption items in the 0-5 percent bracket. Union Finance Minister Arun Jaitley said this chunk would take care of 50 percent of the consumer price index basket. Food grain is likely to be exempted. This partly addresses the big worry of the Reserve Bank of India that the GST rollout will erase the hard-won gains on CPI inflation over the last 2-3 years.
There are two standard rates set — 12 percent and 18 percent. In most likelihood, 18 percent is likely to be the key GST rate that will accommodate most goods and services. Eventually, there is a likelihood that these two rates will be converged closer to the 18 percent band. Some of the goods which are currently taxed at 28 percent will be brought into the 18 percent slab and certain items such as ‘white goods’ that are currently taxed at 30-31 percent and soaps, oils and shaving kits will be moved to the 28 percent slab.
One of the major contentious points is the cess that will be applied above the peak rate of 28 percent for luxury and demerit goods. Primarily these are aerated drinks, pan masala, tobacco and luxury cars. The final incidence of tax on these items will remain the same since the cess will be calculated above 28 percent to match the existing rate (40 percent for all except tobacco, which is taxed at 65 percent). But, imposing cess over the GST rate is a major departure from the original concept. Jaitley has a good rationale for generating the amount to compensate the states from the cess rather than direct tax collection. “If the compensation is to be made through tax collection, the cascading effect will be Rs 1.72 lakh crore, because out of that 50 percent will go to the states and 50 percent to the Centre. Then, out of the Centre’s share, 42 percent would go to the states, along with compensation. So, paying it out of tax will be a huge burden on taxpayers. So, we decided against that,” the FM told reporters at a presser.