The multiple tax structure announced as part of the Goods and Services tax regime that the Indian government intends to implement as of April 1, 2017, may have serious implications on businesses.
The GST Council backed by Finance Minister Arun Jaitley has finalized a four-slab tax structure of varied taxes from 5 percent, 12 percent, 18 percent to 28 percent depending on the goods and services involved.
Two additional taxes – estimated demerit rate of 40 percent on aerated drinks, pan masala and luxury cars and a second 65 percent rate for tobacco products – will be imposed as cess upon a 28 percent rate. The cess along with the clean energy cess is expected to be used to compensate states for loss of revenue for the first five years of GST implementation as promised by the government.
Essential commodities will be taxed at zero percent; goods of common use are expected to fall under the 5 percent tax slab while high-end products will attract a 28 percent tax and above. Most services are expected to fall under the 12 percent and 18 percent bracket.
Besides the arduous task of implementing this complex tax structure from April 2017 onwards, business houses will have to deal with certain important issues before GST becomes a reality.
- Businesses will have to ensure goods are fitted into the most appropriate tax rate. Keeping in mind the purpose of GST is to reduce taxes, goods are likely to be categorized such that they attract taxes lower than the current tax. However, states and the Centre may differ in their categorization leading to further complicating the process.
- Companies would want clarity on whether securities would finally fall under the definition of goods as proposed and hence attract additional tax. Currently, securities are levied with stamp duty, securities transaction tax of 0.1 per cent on delivery-based trades, Krishi Kalyan and Swachh Bharat cess, exchange transaction charges along with clearing member charges.
- Small and medium sized business will have to invest in digitizing their businesses and ensure e-filing of taxes is put in place.
- Companies involved in the business of demerit goods that would attract heavy cess will have to access their total taxation. Will the GST end up being higher than taxes levied until now will need to be accessed.
- Banking and financial services may need clarity on whether GST will be imposed on net interest income. If applicable, GST would end up increasing transaction cost which may have a cascading effect.