4-tier GST rate fixed, from 5 per cent up to 28 per cent

The GST Council, a high-powered forum of the Centre and all state governments, on Thursday decided to fix a four-tier GST rate structure — of five per cent, 12 per cent, 18 per cent and 28 per cent — targeted for rollout from April 1, 2017.

There will be zero tax on 50 per cent of items which are now part of the consumer price index (used to calculate retail inflation) basket, mostly food products, so that there is no inflationary impact on the common man. “There will be zero tax on foodgrains used by the common man,” said Union finance minister Arun Jaitley, who is also chairman of the GST Council, after the meeting. Mr Jaitley said all finance ministers from Congress-ruled states also backed these tax proposals “in one voice”.

On four demerit items — luxury cars, aerated drinks, pan masala and tobacco — that are now taxed at around 40-65 per cent, there will be an additional cess over and above the highest tax slab of GST of 28 per cent for a maximum of five years. This will ensure that tax incidence on these items does not come down. The money collected through the cess will be used by Centre to compensate states for any loss of revenue due to the GST rollout for five years.

A committee of secretaries will now evaluate each product and service to decide in which tax slab it should be put.

Mr Jaitley said most items of mass consumption by the common man would come under the lowest slab of five per cent GST. He said 12 per cent and 18 per cent will be the standard rates under which most products and services will be taxed. The finance minister said that most “white goods”, which currently have an overall tax incidence of 30-31 per cent (including excise and VAT) will be taxed at 28 per cent under GST. However, many products in this category like soap, toothpaste, oil, shaving sticks and even refrigerators, among others, which are used by the lower middle class, will be moved lower to the 18 per cent tax slab in GST. Services will not be taxed at rates higher than 18 per cent.

The decision at what rate gold should be taxed will be taken later. Small cars are also likely to be taxed at 28 per cent. Car companies said in case small cars are taxed at 28 per cent, there will be no scope to slash their prices after the introduction of GST, as was expected earlier. Mr Jaitley said that only one tax rate under GST would have been “highly inflationary”.

The four-tier tax structure that was agreed to is a slight modification of the six, 12, 18 and 26 per cent slabs that were proposed, that were discussed at the GST Council meeting last month. It is estimated that '50,000 crores will be needed to compensate the states for the loss of revenue from the rollout of GST, which is to subsume a host of Central and state taxes like excise duty, service tax and VAT, in the first year beginning April 1.

Chief economic adviser Arvind Subramanian said the rate structure “should probably serve to lower inflation.. and should probably bring it down”.

“A lower rate of five per cent for mass consumption items along with zero tax structure for essential commodities will make GST less regressive and more pocket-friendly for the common man,” said Rajeev Dimri, leader (indirect tax) at BMR and Associates LLP.