Explained: Change in the tax rate fixed by the GST Council

The Goods and Services Tax (GST) Council, at its 47th meeting last week, introduced a number of tax rate changes as part of reverse duty structure reforms, withdrawing certain exemptions consistent with the general change in tax plates and prices. could be a precursor. rationalization in the future.

In changes affecting consumers at the most basic level, the GST exemption for “prepackaged and labelled” retail packaging that would contain foods such as cottage cheese, lassi, puffed rice, wheat flour and buttermilk was withdrawn. However, the discount remains on the items sold loose or unlabelled. The rate change will come into effect on July 18.

What changes is the GST Council announcing?

The GST Council discussed recommendations from four ministerial bodies – rate rationalization, movement of gold and gems, system reforms, and casinos, horse racing and online gambling.

The Group of Ministers (GoM) report on rate rationalization, chaired by Basavaraj Bommai, Chief Minister of Karnataka, was an interim report that included reforms to the reverse tariff structure and the removal of exemptions. The GoM was granted an extension of three months to work on changes to the control plates and rate rationalization.

The GoM had set a uniform 28 percent tax on all three categories of casinos, horse racing and lotteries, but now has an additional 15 days to review its recommendations, which will be taken up at the next GST Council meeting. Expected to be held in Madurai in the first week of August.

Reverse tariff structural reforms lead to rates of 12-18 percent for household goods such as LED lamps, printing/drawing ink, electric pumps, Tetra Pak, solar water heaters, 12-12 percent for finished leather. 5 percent and 0.25 percent to 1.5 percent for cut and polished diamonds. 18% GST is charged for issuing checks. The exemption will also be withdrawn for pre-packaged and pre-labelled foods such as cereals, cottage cheese, lassi, paneer, jaggery, wheat flour, puffed rice, buttermilk and meat/fish (except fresh and frozen). Such foods are now subject to a 5 percent tax at the same price as branded goods. In addition, refunds of accumulated input tax credits for goods such as cooking oil and coal are not permitted.

Room rental rebate also withdrawn: Hotel rooms up to Rs 1,000 per day are now subject to 12 per cent GST and hospital room rentals of Rs 5,000 per day (excluding ICU) are subject to 5 per cent GST. , The GST rate for ostomy/orthopaedic instruments was reduced from 12 percent to 5 percent and for freight and passenger transport by cable car from 18 percent to 5 percent (with input tax deduction).

Regarding system reforms, the GoM has proposed additional physical verification measures at the time of registration for high-risk taxpayers, including biometric authentication, geo-tagging, access to stream data and real-time monitoring of bank accounts. Mandatory e-way billing by states for interstate transportation of gold and gemstones with a minimum limit of Rs 2 lakh has also been approved.

Officials said these compliance measures and tariff changes are expected to generate revenue of Rs 15,000 crore in a year.

Why have the tariffs changed?

Since the introduction of the GST in July 2017, there have been several tariff revisions that have impacted revenue streams that have been deteriorated by the pandemic. Tariff rationalization measures are also gaining momentum as the five-year guaranteed compensation mechanism for states for revenue losses due to GST implementation ended in June after at least a dozen states asked to extend it. Despite this, the Council did not decide to increase it. Despite the increase in GST receipts, experts say that fiscal 2013 could be a challenging year for states heavily dependent on compensation.

There were also concerns over disputes and lost revenue, which led to the withdrawal of exemptions for pre-packaged items. It was observed that some companies abused the exemption by not registering unlabeled food. For example, it turned out that a branded rice manufacturer was selling items with a similar-sounding label but had not registered them as a trademark and was therefore selling them under the exempt category.

Last year, taking into account the development of sales below the non-tax rate, the GST Council decided to consider a series of measures, including rate rationalization, to correct the inverted duty structure and the future tax rate structure. Overhaul increased revenue. The move comes four years after GST’s inception, acknowledging that a series of rate cuts on over 500 items over the years has resulted in a smaller-than-expected jump in revenue for both central and state government finances. The GST Council had reduced the rates within a year of their July 2017 implementation. The tax cut on over 350 items of the total 1,211 items in five broad categories of zero, 5 per cent, 12 per cent, 18 per cent and 28 per cent under GST is estimated to have resulted in around Rs 70,000 in lost revenue. crore in a year.

An inverse tax structure arises when the input or end product tax is less than the input tax, resulting in an inverse accumulation of input tax credits, which in most cases are recoverable. For sectors such as mobile phones and shoes, the reverse fee structure resulted in a return of Rs 5,500 crore and Rs 2,000 crore respectively.

Fixed reverse tariff structure for mobile phones (March 2020) and shoes (September 2021). It was also decided to correct this for textiles in September 2021 but was later withdrawn at a specially convened meeting with an agenda in December 2021. In terms of rate rationalization, the GoM was given the additional task of studying textile reversal along with other sectors. Including utensils, tableware, tractors, medicines, incense sticks, some farm machinery, etc.

What is the non-revenue rate decline and what is the revenue position?

The committee, headed by then-Chief Economic Adviser Arvind Subramaniam, believed the income-neutral rate should range from 15 to 15.5 percent (including center and states). This was done against the background of a two-rate structure, a standard rate close to the RNR, which would tax the tax on a maximum tax base; and a high error or sin rate. A September 2019 Reserve Bank of India (RBI) report found that the GST Council’s rationalization of rates has reduced the effective weighted average GST rate to 11.6 percent from 14.4 percent initially.

According to the latest revenue data shared with the Council, the average gap across India between protected revenue and post-settlement gross SGST revenue was 27.2 percent in 2021-22, up from 37.9 percent in 2020 -21 In 2021-22, only five out of 31 states/UTs – Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim – reported revenue growth above the protected revenue rate for states with GST. Puducherry, Punjab, Uttarakhand, Himachal Pradesh and Chhattisgarh recorded the highest revenue gap between protected revenue and government GST gross revenue after settlement in 2021-22.

What impact will consumers have?

The increase in the prices of everyday items such as LED lamps and packaged foods such as wheat flour, paneer, cottage cheese and lassi is likely to push up corporate prices and add to inflation concerns. The 12 percent tax rate for hotels below the Rs 1,000/day tariff is expected to hit the tourism segment in cities outside the metropolitan area, government officials said. However, the headline retail inflation rate based on the CPI should not be affected much as these items have a smaller weight in the index.

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“It is unlikely that this will have a significant impact on inflation. Some of these items, such as spoons and knives, are not procured on a regular basis and some of these items have a very low weight in the CPI, e.g. For example, items such as petrol/diesel have a high weight in the index. The weight of hotels for stay in the CPI is 0.00904, even if we assume that all hotels are below the Rs 1,000/day rate, a 12 percent increase in GST would result in an increase of 0.11 basis points . If we assume that all lightbulbs/fluorescent tubes are LED, that would be a 0.97 basis point increase in CPI. Quark could see a gain of 0.47 basis points. Hence, CPI inflation is unlikely to be boosted significantly,” said Devendra Kumar Pant, chief economist at India Ratings.

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