GST Council clears rules, states agree to July 1 rollout

​In news:
The GST Council has cleared the pending rules, including transition provisions and returns; with all the states agreeing to 1 July roll out of the Goods and Services Tax.
Highlights:

  • The GST Council had last month fitted over 1,200 goods and 500 services in the tax brackets of 5, 12, 18 and 28%.
  • Finance minister Arun Jaitley chaired the 15th meeting of the GST Council which is scheduled to decide on tax rate of 6 items including gold, textiles and footwear.
  • As for the transition rules approved by Council, the industry had been demanding some relaxation of the provision of deemed credit.
  • The draft transition law provided that once GST is implemented a company can claim credit of up to 40% of their Central GST dues for excise duty paid on stock held by businesses prior to the rollout.

Scope for more rationalisation:

  • It’s been nearly two weeks of confusion since GST rates were announced for close to 2,000 goods and services. While it is clear that essentials are either in the nil or 5-per cent category, there are some inconsistencies and there is a scope for rationalisation of tax rates on various goods and services.
  • The GST Council could take into account specific objections such as the need to review the rates on food grain, puffed and flattened rice, and the rates applicable in the electricity, hospitality and entertainment sector. 
  • By placing insulation cables and wires in the 28-per cent category (‘luxury’ and ‘demerit’ goods), the price of power could see a spike. Since electricity, like alcohol and petroleum, is out of GST, power companies cannot claim input tax credit.
  • Higher rates on pharma items such as rabies vaccine could lead to victims avoiding such treatment. Generally speaking, higher rates in the case of B2C items could have inflationary and welfare impacts. 
  • The three percentage point rise in services rate to 18 per cent is worth considering, since these are largely in the B2C category. Some egregious errors have crept in such as plastic commodes and even wigs and other items made out of human hair being highly taxed.
  • Hotels may resort to creative accounting to escape a higher tax bracket, as indeed would many other sectors. A multiplicity of rates distracts from the stated GST goal of making tax compliance easier.
  • The GST Council has taken the easy route of fixing most rates at close to the current central excise plus VAT rate in the case of goods. Seamless implementation of input tax credit — thanks to the Centre and States dipping into the same basket of goods and services for their revenues, thereby reducing leakages — should have led to lower rates.
  • The Council seems to have been guided by a motive of short-term revenue maximisation, rather than easing the burden on business and raising tax revenues by boosting economic activity. The Council should work towards reducing the number of rates and tax incidence.
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