GST rollout: After rate fixing, let's now hope the transition is smooth

Consensus among GST Council members on rates is commendable and bodes for a good future

The GST Council at its meeting on May 18, 19 has evolved a consensus on GST rates for goods and services, leading us closer to July 1 implementation. This is indeed commendable and demonstrates the efficacy of this new federal policy body which bodes for a good future.
 
The underlying objective of this rate fitment has been clear for some time, which is to maintain the current effective indirect tax burden (Centre and State taxes together) within the agreed multiple rate structure to control inflation and avoid surprises. The focus has also been to see how best mass consumption items can be kept at an optimum rate and ensure social equity. While this exercise has been successful in most cases where goods are concerned there are some outliers even in case of mass consumption items like detergents, paints etc. where there has been a rate increase.

 
Essential goods have been kept at either nil or at 5% to control inflation in the mass consumption basket, besides goods like coal at 5% which will benefit thermal power, steel industry and other coal consuming sectors. Capital goods by and large are at 18% which is welcome considering the capex cycle that is likely to happen in the next few years.
 

At the outset many believed 28% will have a smaller set of goods but as the dialogue proceeded it was evident several goods which currently attract 22-25% could also potentially fall in this bracket and that was the outcome. This meant consumer durables/ electronics small and large fell under this bracket though many of these in today’s context are of significant consumption. Also some goods at rates of 12% like tractors may end up with an inverted duty structure with inputs at higher rates leading to refunds.  As long such refunds are addressed in a timely manner the issue can be somewhat cushioned.

 
Mobiles will be at 12%, vs. the current concessions, so it remains to be seen how domestic manufacture will progress going forward in this sector. Small cars, motorcycles as expected are at 28% but the cess elements in such cars was news. Equally treatment of hybrid cars at 28% plus cess of 15% was a surprise, considering the fact that a push for such vehicles is good environmentally.  While this multiple rate structure maybe a pragmatic at this stage our endeavour should be to move to 2 rate structure gradually within the next few years, once increased compliance and transparency produces revenue buoyancy and instils confidence.

Services fitment was along similar lines, so we have ended up with a less than ideal multiple rate structure, with more rates than the current service tax. Here again rate fitment saw the socio-equity objective with entertainment, luxury hotels and high end restaurants at 28%, while transportation – rail, road and air (economy) at lower rates of 5% with specified input credits. Also current exemptions were maintained with healthcare, education outside the purview. Telecom and financial services are at default rate of 18%, whether these sectors can cushion the increase with efficient credit chain is debatable.
 
What is still awaited are transition credit rules and rates for critical goods like gold, garments, biscuits. Transition rules specially the presumptive credit for excise beyond the document chain is critical as that will determine how distribution chain will behave vis a vis stocking/ de-stocking of goods in the run up to GST. While the law making, rates and rules are finally falling into place, one area which is equally critical is the readiness of GSTN, critical for compliance reporting. The Council is expected to review the same in the June 3 meeting which is welcome.

 
It’s time now for all stakeholders to brace up for July 1 and hope the transition is manageable with limited disruptions. The author is Indirect Tax Leader, EY