GST Council fits close to 500 services under four slabs

The two-day summit to finalise the goods and services tax (GST) concluded in Srinagar on Friday with most of the job done, but leaving a lot unfinished. The rates of six categories of products, including bidis, gold, agriculture implements, textile, footwear and bio-diesel, will now be taken up at another round of meeting on June 3 in New Delhi.

While the GST Council, chaired by Union Finance Minister Arun Jaitley, brainstormed on thousands of items ranging from consumer goods to luxury cars, steel and coal to betting and gambling, in a plush hotel against the backdrop of Dal Lake, the action shifted to historical ‘Chashme Shahi’, a royal spring at one of the Mughal Gardens, for announcing the outcome of the summit on Friday. The choice of venue became a talking point as former prime ministers Jawaharlal Nehru and Indira Gandhi are believed to have often got water to Delhi from the Chashme Shahi spring.

But the summit was all about business, even as some government officials were planning to stay back an extra day to take in the sights of Gulmarg. As for rates, the Council members — state finance ministers — deliberated for hours on Friday to get a fix on almost all services, swiftly progressing towards the July 1 roll-out of the unified indirect tax regime.

“We are in a state of readiness (for the July 1 roll-out)... The rates are not inflationary,” said Jaitley.

Close to 500 services had been slotted in four slabs of 5 per cent, 12 per cent, 18 per cent, and 28 per cent, whereas the currently exempted categories, including health care and education, would continue to be out of the tax net, Jaitley announced at Chashme Shahi.

Jaitley said: “Although the GST rate of 18 per cent on services is higher than the 15 per cent existing rate, the actual incidence of tax would be lower as service providers would get credit for the taxes paid on the goods used for the provision of services.”

“After a long debate, the GST rates in relation to the services sector have been completely adopted in today’s meeting. Most of the services exempted at present, will be grandfathered and will continue to be out of the GST,” said Jaitley while briefing the media surrounded by lush green mountains, a thick cover of trees and the tightened security of J&K Police, the BSF and the CRPF.

Grandfathering of these services essentially means that the Council may decide to impose tax on these sometime in future.

Rail, air and road transport will fall in the 5 per cent tax slab. Hotels with tariff under Rs 1,000 will be exempt from the GST. Hotels with tariff between Rs 1,000 and Rs 2,500 will be taxed at 12 per cent, those with tariffs between Rs 2,500 and Rs 5,000 will attract a GST of 18 per cent, whereas hotels with tariffs of above Rs 5,000 will fall under the 28 per cent tax slab. All five-star hotels will fall under the 28 per cent category, making it much more expensive for fine dining.

Non air-conditioned restaurants will attract a tax levy of 12 per cent whereas air-conditioned restaurants will fall in the 18 per cent tax bracket.

Restaurants with a turnover of up to Rs 50 lakh will have the option of availing of the composition rate of 5 per cent.

In fact, categories like five star hotels, gambling, race club betting and cinema have been put in the highest bracket of 28 per cent. The entertainment tax is currently imposed by the states. Now, since local body taxes will be subsumed under GST, states will be free to impose an additional tax over 28 per cent on entertainment to fund the state local bodies, said an official. Cinema is the only category where such a carve out has been created by way of law. A decision on the fitment of rates for lottery is yet to be made.

“Services, which are currently taxed 15 per cent will be fitted into the 18 per cent bracket. However, services will get the benefit of input tax credit for the goods used, so real incidence of taxation will be lower than the headline rate,” Kerala Finance Minister Thomas Isaac said after the meeting.

The Council had approved rates for 1,211 goods category on Thursday and approved seven key rules.

“Most work related to the roll-out is complete. A few things remain like the rates for the six categories. We need more time for discussions. Residuary rules will be put up in the public domain for comments and need to be approved,” he said.

The availability of input tax credit to the services industry for the goods will lower prices, according to the minister. He added that the proposed anti-profiteering body will ensure that the companies pass on the benefit of lower tax incidence to consumers.

“Dealers can’t charge tax more than the tax they pay. The net effect of GST will not be inflationary,” the FM said.

The Council will oversee the state of preparedness of GST Network, the IT backbone of GST.

On transport, the Council decided that most services will fall under the 5 per cent category. Railways and air have been kept in the lowest bracket as petroleum is the key input but is out of the GST net. Hence, the sector will not be able to avail the input tax credit.

While financial services, insurance and telecom will attract a GST rate of 18 per cent, the Council fixed the tax collection at source for e-commerce companies at 1 per cent as against a provision of up to 2 per cent under the law. This tax will have to be collected by the e-commerce players on behalf of the suppliers, who in turn could avail refund in the next tax cycle.

Works contract, that currently see a central tax of 6 per cent and a state tax of 1 per cent or 5 per cent , will now be taxed at 12 per cent. The sector was unable to avail input tax credit for the inputs used like cement and steel that are taxed at 28%. “It currently pays an embedded tax of 28 per cent for cement and steel and an additional tax of central and state levies. Now there will a uniform rate of 12 per cent with all input tax credits,’’ the FM said.

Pratik Jain, leader, indirect tax, PwC India, said that the multiple rate slabs, particularly the 28 per cent slab would make GST much more complex. “A 12 per cent rate for works contracts, with full input credit, is an encouraging development as it would be a simpler tax system and should reduce the cash component of the economy. Similarly a 5 per cent rate for transportation, including economy class air travel and cab aggregators is a good move and would ensure that incidence of tax on consumer does not increase for such services,” Jain said.