For the government meeting the GST deadline might be a significant milestone. But for the common man, it all boils down to how tax rate changes influence their home budget. Will your monthly budget shoot up or soften? Will you be able to afford your next white good purchase? Or its time to tighten the strings? Let’s find out the real truth.
The GST slab formula
One of the major objectives of GST has been to streamline the speckled output tax structure. It was hard to put a logic to which goods attracted what tax. Nobody could really tell how much they paid in taxes on purchases. Many slabs of tax and taxes that were levied based on which state your goods were manufactured in, messed things up.
Under the GST, government has laid down a 4 rate slab structure.
Zero tax rate – As per the details available so far 50% of the items that are included in measuring the Consumer Price Index (CPI) will attract zero tax. However, many of the items in local VATs were already zero rated. Several common use items like grains, wheat, rice, pulses, salt, turmeric and several masalas were already exempted from VAT in many states. Some experts have talking about the zero rate leading to cheaper goods a lower CPI or simply lower rate of inflation. But CPI is calculated by allocating weights to each of these items. And food items carry about 50% weightage in CPI. Of which many were already exempted from VAT or taxed at very low rates.
5% on common use items – As of now details are not available of what constitutes these common use items. Would these include packaged goods? Such as bread or biscuits or toothpaste? Which are for all purposes ‘common’ use items. A lot remains unsaid about the taxation of these. Specially processed and packaged goods which are a source of revenue for the government and are manufactured by consumer good giants. It seems far from the truth that the government would aim to significantly lower taxes on these. So a big question mark about what constitutes these 5% eligible items.
12% or 18% standard rate – This slab is where the large chunk of tax revenues will come for the government. Remember that a majority of goods attract a 12.5% VAT, excise duty for a large number of goods is 12% too. So our guess is most items will fall in this bucket and will continue to be taxed similarly or may actually attract a higher slab of 18%.
How will services be taxed – The other conundrum is how will services be taxed. Finance Secretary, Mr Adhia has mentioned an 18% rate of tax for services. But we should wait for either the finance minister or an official document to confirm this. If services are not broken up into slabs and taxed at a flat rate (likely since tax on services may continue to be a centre jurisdiction), 18% will mean a lot of your basic services, like telephone, drycleaning, mobile bills, parlor visits, tailoring, restaurant bills, all will get more expensive.
28% + Cess – The highest slab rate has been fixed at 28% but a cess has also been added to this highest rate, which may bring it to 30-31%. This slab has been kept for tobacco, luxury cars, aerated drinks and other ‘sinful’ purchases and rightly so. The easiest way for some governments to improve collections is to tax consumption of luxury goods where the ultra-rich may continue to be able to afford them. It also makes a lot of sense to set high rates of tax on items such as tobacco or aerated drinks, now being done in several parts of the world.
While cess has been proposed for a 5 year period. And is in place to compensate the states for loss of revenue, hardly any cess is ever rolled back. Usually they just continue in some form or the other.
What should you do?
In our opinion, before you start to rejoice (or worry), its better to wait for the final classification between slabs to be announced. And of course continue to manage our home budgets smartly. Even though rates may not significantly lower your budget, take heart from the fact that GST is slated to plug several tax loopholes over time. Bring in more and more taxpayers within the formal structure, bring ease of business across states and reduce power of states to levy taxes. All this can lead to a buoyant & compliant economic environment, which is most certainly good for everyone!
Have something to say about the slab rates? Or want to share your views about this post, go comment, we’re all ears 🙂