Tax Talk

Complex web: Why too many tax slabs could defeat the very idea of the Goods and Services Tax

The GST regime could end up with 10 effective tax rates.

Going to the movies can be quite taxing now: buying a ticket for less than Rs 100 will attract tax at 18% while a ticket for over Rs 100 will be taxed at 28%, according to the latest Goods and Services Tax guidelines decided on Sunday. This is symptomatic of how India’s most sweeping tax reform since Independence is turning out to be – variable, complicated and, most of all, unpredictable.

GST is an attempt to turn India into a common market by folding all indirect taxes, from octroi to service tax, into one rate that would be consistent nation-wide. But the promise of “one nation one tax”, which is how the government has advertised it, has given way to various conditions, guidelines and complexities that make the final product much more confusing than originally envisioned.

The GST is set to be rolled out on July 1, nearly 16 years after being put in motion. But the regime will be substantially different than what most people would have imagined. For one, there are six tax rates ranging from no tax to 40% within which the central government is trying to fit all commodities. Although it still means similar products will be taxed at the same rate all over the country, this is much more complex than a single rate of 15%-18%, as suggested by reports last year.

Worryingly, GST rates are being changed by the GST council on the basis of industry representations to the fitment committee. This committee is tasked with fitting all goods and services into relevant tax brackets based on the rates and additional duties, such as excise, that they attracted earlier. In principle, this sounds fairly intuitive as one might expect commodities to be taxed at more or less the same rates as before.

In reality, however, the GST has turned out to be a complex web of conditions instead of a clean tax regime like that of New Zealand, where a flat rate of 15% is applied to all goods and services. In India, the effective number of rates will rise to 10 (plus zero tax), if one includes the addition cesses that will be levied for certain commodities, according to a recent column by Devangshu Datta for Business Standard.

“In practice, it [GST] will increase the pain of compliance, if not the cost, a lot. It also has clauses that offer scope to create a single market for corruption. Along the way, it will generate a huge amount of make-work,” Dutta wrote.

The rates finalised by the GST council are zero tax, 5%, 12%, 18% and 28%. The highest tax slab is for luxury and so-called demerit items which will also attract additional cess.

Six other cesses continue to remain in place even though the government had claimed the GST will subsume all cesses and taxes. These are:

  • Education cess on imported goods
  • Secondary and higher education cess on imported goods
  • Cess on crude petroleum oil
  • Road cess on motor spirit and diesel oil  
  • Special additional duty of excise on motor spirit
  • National Calamity Contingent Duty on tobacco, products thereof and crude petroleum oil  

Is it any better?

This complexity is precisely why the industry has been both welcoming of and a bit worried about the GST. There is still no certainty on the taxation that will follow and heavy penalties await those who miss deadlines for filing applicable forms. This is why some of them are now reaching out to bureaucrats for help.

The Chamber of Associations of Maharashtra Industry and Trade, an umbrella body for industry associations in Maharashtra, has met with the state’s finance minister and chief commissioner of sales tax to lobby for lowering of tax rates on certain commodities and also for simplification of tax slabs.

“The concept is welcome but the law needs a lot of work to make it viable for industries,” said Mitesh Modi, the chamber’s joint general secretary. He said many commodities used in the manufacture of equipment that they consider essential have been “unfairly” put under the 28% tax slab.

“Nowhere in the world you have so many tiers to the GST structure,” Modi said. “The industry was expecting merely two slabs but now we have got so many which will only increase compliance burden.”

This sentiment was echoed by ClearTax founder Archit Gupta. ClearTax is aiming to provide GST services through its online tax filing platform for businesses but Gupta said the industry is nowhere near prepared for a July 1 rollout.

“We have not seen too many people signing up for GST migration just yet,” Gupta said. “There is a lot of gap in transition and some industries are downright unaware how to go about it. Multiple slab rates do add to the complication but the government claims that it kept inflation in mind while deciding rates.”

Radhika Pandey, an economist at the National Institute for Public Finance and Policy, argued that multiple slab structures could be necessary owing to different consumption patterns and demand, but uniformity in pricing is important.

Pandey said the tax rates should be based on economics and not industry lobbying. She warned that the complexity of the GST could hurt small enterprises. “Another potential challenge could be the lack of preparedness on the part of small and medium enterprises. They may not fully understand the system in the initial phases,” Pandey said.

Still, there might be some benefit for businesses in moving to the GST as the government claims that the weighted average tax burden will come down on the average basket of commodities. Additionally, the GST subsumes a host of levies and taxes, which will now be available as input credit for manufacturing firms that currently pay tax on both the inputs as well as the final product.

“India’s current tax codes are so horribly complex that even this khichdi is an improvement,” Datta summed it up in his column. “If it does stop tax cascades, and if refunds and rebates come without undue delays, it would result in lower tax incidence for many organisations.”

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