The GST Council crossed the Rubicon last Friday when it agreed upon the rates applicable on 500 services and about 2,000 goods. While the rate slots for the crucial categories of textiles, gold, bidis and footwear are yet to be decided (for which the Council meets again on June 3), the Srinagar meeting marked a major leap forward, particularly in a time of political acrimony. The July deadline for moving to GST still looks difficult to achieve, but the groundwork — from passing the laws concerned, arriving at rates of zero per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent for all goods and services, to fixing the levies for goods and services — is finally complete. Twelve States have passed their respective SGST legislations (allowing them to tax services as well), while the Centre has passed its CGST law (allowing it to tax goods so far exclusively taxed by States) and three others — one for Integrated GST applicable on inter-State transactions, a law for Union Territories and one compensating States for the transition. The rest of the States are expected to pass their SGST laws at the earliest. A document spelling out the process of transition from VAT to GST would also have to be drawn up by the States. But this is only the last and easy part of a 17-year journey which will culminate in a landmark tax reform. By subjecting all taxable goods and services to Central and State taxes, placing them under four or five rates and allowing input credit in the case of most, India’s tax system would finally have been freed of its clutter. The next step is to anticipate and address teething issues, such as the operation of the GST Network. Indeed, the GSTN must have a dry run, given the volume of data it will deal with on a dynamic basis.

The Srinagar outcome has given rise to a debate on the inflationary effects of GST. On the manufacturing side, FMCG goods will attract a lower GST, while in the case of capital goods, cement, metals and pharma there is almost no change in levy. However, B2C services that have moved into a higher rate bracket (from the current level of 15 per cent to 18 per cent or 28 per cent) will become expensive. These could include telecom, finance, AC restaurants and business class travel. A rate increase should not matter in the case of B2B goods or services. The Council has said that it would come down on "profiteering", but this should not turn into overreach and tax terrorism.

There are still some oddities in the GST law, such as the ?20-lakh annual turnover threshold not applying to inter-State transactions in goods and services. This does not take into account the fact that small service sector providers could be operating across regions. Such glitches can be addressed in due course.

 22 May 2017, 08:29 AM