New Delhi: A four-tier GST tax structure of 5, 12, 18 and 28% that aims to lower tax incidence on most goods and keep out essential items was decided by a high-powered council on Thursday, a major breakthrough for the rollout of the Goods and Services Tax regime from April 1 next year.
Luxury items like high-end cars and demerit goods including tobacco, pan masala, and aerated drinks, will be taxed at the highest rate and would also attract a cess in a way that the total incidence of tax remains at almost the current level.
With a view to safeguarding the interest of poor and keeping inflation under check, half the items in CPI basket like foodgrains, would not be taxed at all, while there would be two standard tax rates of 12 and 18%.
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The lowest rate of 5% would be for common use items under the GST regime targetted to be rolled out from April 1, 2017.
After differences kept away a consensus on the issue at the last meeting, the all-powerful GST Council, headed by Union Finance Minister Arun Jaitley, has decided to impose an additional cess. It would be the difference between the current incidence and the 28% rate, not leading to increasing in the final taxation.
Tobacco currently attracts about 65% total tax and for aerated drinks, the current rate is about 40%.
Announcing the decisions arrived at the first day of the two-day GST Council meeting, Jaitley said highest tax slab will be applicable to items which are currently taxed at 30-31% (excise duty of 12.5% plus VAT 14.5%).
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“Finally, the consensus is that these items, with the cascading effect of 30-31%, will now be taxed at 28%, but with a rider. And the rider is that in this category there are several items which are now being used increasingly by a very large number of people, particularly the lower middle class. So for them, 28 or 30 or 31% rate will be higher, and so we are transferring them to 18%,” FM Arun Jaitley said.
The final list of items for each tax bracket will be worked out by a committee, Jaitley said, adding that soap, oil, shaving stick, toothpaste and such products will likely to move down to 18% bracket.
Chief Economic Advisor Arvind Subramanian said the rate structure “should probably serve to lower inflation, and should probably bring it down.”
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For most items, GST will be excise duty plus VAT and that incidence will decide on which tax bracket particular goods or items fall into.