The indirect taxes are likely to come down as preparation for GST roll-out begins. But the GST in reality will not be one tax but a combination of many taxes and cess.
The rates also will not be one. The GST Council has decided on a four-slab structure - 5, 12, 18 and 28 per cent. In addition there will be an additional cess of 12 to 15 per cent on luxury and sin goods, including luxury cars!
“The cap on cess on demerit goods on top of peak rate of GST has been kept at 15 per cent, but effectively it will be only 12 per cent,” says finance minister Arun Jaitley, who is also the chairman of the GST Council.
The GST is said to bring uniformity in taxes across states. But the definition of demerit goods leaves a wide chasm. Sin tax is to be levied on goods like tobacco and alcohol.
The current taxes like excise duties, service tax, customs duty etc. will be merged under central GST (CGST). The taxes like sales tax, entertainment tax, VAT and other state taxes will be included in state GST (SGST) and inter-state deals under Integrated GST.
A compensation draft law to enable the Centre to compensate the losses for the first five years is also on the anvil.
But it would not include the very basic of the lifeline - petroleum products. It is likely to leave a wide window for the states and Centre.
In short, the indirect taxes would be around 40 per cent and on petroleum-type products, not covered by GST, taxes are likely to go up.
For instance, UP is planning to hike it by 5 per cent more as it plans to waive farms loans worth about Rs 27,000 crore. It may happen in other states as well since the window for levying taxes has come down.
Petroleum products may have higher levies in some states. It is likely to add to inflation when the crude prices are coming down.
The government has decided to abolish 16 cesses that bring Rs 65,000 crore revenue in its preparation for GST roll out. This includes Krishi Vikas and Swachh Bharat cesses.
It seems it would reduce tax burden. In reality, it may not be so as the new laws have enough provision to maintain the rates near the high current level to “neutralise the losses to the states and Centre”.
The GST is collected on value-added goods and services at each stage of sale or purchase in the supply chain. The GST paid on procurement of goods and services can be set off against that payable on the supply of goods or services.
The manufacturer or wholesaler or retailer will pay the applicable GST rate but will claim back through tax credit mechanism.
It is a consumption-based tax targeting the “destination” of the final consumer. So whatever the levies at whatever stage, it would finally burden the common man. It is not easy to estimate the total impact on him.
The multiplicity of taxes may add to the problem of traders and industry. Finally the rates on individual goods may not be one. If goods are traded from one state to another, the provision of inter-state tax under IGST can end up having different prices at different places.
Add to this the various tolls that local bodies impose. This could make it more complicated. The industry is apprehensive that the uniformity that was supposed to be the base of GST may not be its strength.
Different cess has been proposed on cigarettes, tobacco products under the GST regime above the highest rate of 28 per cent.
Cigarettes, currently taxed at 53 per cent, would attract a cess rate of 15 per cent. But if cess rate of 15 per cent each is levied by the Centre and state and say there is also one per cent IGST, the total taxes would be around 28 plus 60 plus one per cent, that is 89 per cent.
The basic principle is to have taxes at the current level. So, if the current rate of taxation on a product is higher than the GST rate, the cess will make up the difference.
At the moment, the government levies a different rate of tax on items such as luxury cars, high-end watches apart from tobacco. The highest proposed tax slab is likely to be equal to the difference between current tax incidence and the highest tax slab along with a cess.
This means that there will be a separate cess on each of these items. It is likely to complicate the GST tax structure. Even gold is likely to have a tax of 4 per cent.
If there are six different cesses, it means 10 different rates of GST.
Then the taxation on cars and automobiles is likely to be more complicated at state levels. The GST was aimed at having a uniform rate. Even now the NCR regions have different rates in Haryana, Delhi and UP. That would continue.
The non-luxury cars are virtually non-existent. Except 800 or below 1000 cc every vehicle is a luxury - a queer socialistic definition in a market-oriented economy.
If there is a separate cess on petrol cars above 1200 cc and diesel cars – another Quixotic idea – there may be more than four cesses for cars alone.
According to the government’s own calculations, told to the council, the proposed GST structure would bring down prices of pan tobacco and intoxicants by 0.22 per cent. The category has a two percent weightage in the consumer price index.
The cesses are supposed to be removed after five years – the period states are supposed to be compensated for losses. But this country does not have a good record on removing the cesses. The lure of having more revenue also impacts decision making.
One good aspect is that it allows the business to take credit on taxes, a new concept. It is aimed at reducing the burden. It all the same complicates book-keeping.
Another aspect bothers small traders. Many goods are now not under the tax net. After the multi-level GST, the exemption list would have few items.
The impact will be felt by the consumer as he would have to shell more. It is not clear whether over 25 per cent taxes a consumer pays at restaurants would at all come down.
The consumer may not have any relief. He may have to pay higher price for almost every good.