With GST implementation date inching closer, we can now clearly see the singular focus of unifying the economy into a common market under this new regime. Post the GST Council Meeting held on 18th and 19th May 2017, the contours of the GST regime have become much clear.
The Council has largely worked out the details of the fixation of the goods and services to a four-tier tax structure: 5%, 12%, 18% and 28%. While the GST rate schedule indicates that nearly 81% of all the items are in the 18% tax bracket or below, the remaining 19% fall in the 28% tax slab, the GST Council has tried to keep the tax rates lower to keep a lid on inflation and nurture economic growth.
With this news, we have decided to bring to you a brief analysis of the Impact of GST rates on different goods and services.
- Categorisation of several consumer products like soaps, toothpaste, and hair oil, under 18% is good news for consumers. Similarly, several food items such as edible oil, tea, coffee, sugar, etc. have been kept at 5% (with an exemption for fresh milk and food grains) brings about a great for the industry.
- Reduction in the tax rate on domestic coal from 12% to 5% will provide a relief in the cost of power generation despite witnessing an increase in capital cost with higher tax rates levied on the boiler, turbine, and generator segment. The steel and power companies that depend heavily on coal will benefit as well. The lower prices of domestic coal may also detract power producers from procuring imported coal.
- For cement, GST slab rate is increased to 28%, as opposed to the existing indirect tax incidence of around 24-25%. However, since metal-ore has been cut to 5%, this comes as an additional benefit.
- Cars will attract GST at the top rate of 28% with a cess in the range of 1%-15% on top of it. No major impact on four-wheeler automobiles is expected as GST plus cess for most auto segments is closer to the existing indirect tax rates. While for two-wheeler automobiles, the rate is slightly below the indirect tax rate which may help to support volume growth for companies like Hero Moto and TVS Motors.
- GST on financial services will be 18%, an increase by 3% from the previous rates. However, the availability of input credit will partially neutralize this impact.
- The transport service of GST at 5% will be anti-inflationary. GST will be just 5% on economy flying, which will help airline companies like SpiceJet and Indigo give a bigger push to program Udaan.
- Also, healthcare and education will continue to remain exempt under the GST regime to maintain the affordability of these basic services.
- The GST Council decided that telecom services will attract a tax rate of 18%, i.e., 3% higher than the current 15% of service tax. This will augment the existing burden of the industry further. The voice and data services will become more expensive for the consumer and in turn, may disturb the demand levels and telco earnings.
- The GST rate decided for entertainment tickets is 28%. This is at par with gambling and five-star hotels. The proposed GST rate is more than the present effective average tax rate of 8-10% on tickets. Also in some states, the local bodies will be empowered to further tax theaters, increasing the tax burden on the consumer. Watching movies in a theater is being considered as a luxury under the GST tax regime proving to be a major setback for the Indian film industry.
- Soft drinks and flavored water have been placed in the highest tax slab of 28% combined with an additional cess of 12%*. This increase will have a negative ripple effect disturbing the chain of manufacturers, distributors, and retailers, thus limiting the growth of the Indian beverage industry.
- Prices of televisions, refrigerators & air-conditioners are set to go up by 4-5% from July onwards; proposed at 28% GST on consumer electronics and durables as compared to the current tax rate which is around 23%. No doubt, the additional tax burden will be passed onto the consumers leading to a temporary negative impact on sales in the beginning.
- The high rate of GST on hotels may have an adverse impact on the tourism industry as well. The hotels that charge over 5000 rupees a night have come under the highest tax bracket of 28%. For India, charging 28% tax will not be globally competitive when other nations like France charge 5.5%.
What are your thoughts on GST rates? Will the rates have a positive or a negative impact on different goods and services? Share your opinion in the comments below!