Government as promised has released the rate schedule covering over 1200 items thus sustaining the GST momentum. Now states have to align realistically and in a meaningful way, which they had been so far on this subject. No big shocks and surprises and the existing Tariff format with the needed changes have come into place. Indeed a crucial leap and hearty compliments to those who had put their heads into it.

The critical question is will GST drive itself into the system on 1st July. One should understand that a New Legislation can take off without difficulty on an existing format. Whereas it's not that easy to take off, if it involves mutual trust, cohesion, commitment and involvement between the participating partners in the Federal Structure. The backbone of GST implementation is the technology orientation, induction of all participating players and it's smooth implementation.

Any amount of preparedness still appears to leave a huge vacuum. Looks like the magic rope in the hands of Devaki trying to latch and tie down the Mystic Mesmeriser Lord Krishna, always shirt by inches.

So who is to blink first. At this pace Government will be unwilling to do that. Trade has to take this sensible call and initiative and Government will happily extend it after proclaiming it as a Trade accommodation.

Intact trade should suggest a trial period, before the final whistle and Green light is blown and shown after which it becomes irreversible. 

The multiple tax slabs for services, and, the segmentation within hotel services and air transport‎, will invite some scope for comment for those who were hoping for greater simplicity. The practical complications on services will be multiplied when the valuation of services is to be undertaken.

We shouldn't miss applauding the FM and team for achieving a near impossible balance of fixing rates which can tame inflation while still ensuring revenue neutrality.

Most importantly GST from 1st July, 2017 is a reality. That is a seminal moment for the country. 

It appears that the GST Council, in fixing the rates for goods and services, has limited its focus on meeting the primary objective of removing the ill-effects of tax cascading and creating a seamless credit chain. Fixation of rates as a part of tax policy, which is an integral part of the design of any indirect tax system i.e. the power to tax, ought not be confused with rates being fixed on goods and services for implementing GST for meeting the primary objective.  The current exercise is essentially arithmetical in nature and not as much a decision in exercise of the power to tax, which continues to vest with the States and the Union.  The rates fitment table has followed a common thread of thought i.e. (i) find the current tax incidence on each category of goods and services; (ii) eliminate the effect of tax cascading in that category; (iii) arrive at a rate that is closest to bring about the same effective rate of tax; and (iv) fix the peak rate for items that attract the compensation cess and luxury goods and services.  In simple terms, the rate notified for each category is a revenue neutral rate for that category.  Most services falling in the 18% category is not a surprise as the Union had deferred its decision to enhance the service tax rate ahead of GST. In aforesaid method, the outcome is bound to inherit the distortions of multiple rates in the current tax system.  Thus, GST when implemented would not remove the trade distortions caused by multiples rates and the litigation fatigue arising out of “classification” would also remain.

The Council decision on services rate structure reflects the logic applied for goods, basically to stay close to current effective rates. This has led to a less than ideal multiple rate structure for services which we hopefully will merge as we go along. Would have liked to see a decision on transition credit provisions specially on the presumptive excise duty credit as this will decide the behaviour of stocking/ unstocking which is critical for the industry. Hopefully we will have clarity in the June 3 meeting. July 1 implementation now looks imminent so all need to brace up for the last lap in the coming weeks. 

A tight rope walk has been achieved in terms of aligning commodities in to various tax rates in a manner that the incidence of tax is not too different from the current incidence. A single rate regime for services has been given a go bye by introducing a four rate structure.

The multiple tax rate regime is not new for indirect taxes. In the pre VAT sales tax regime the State sales tax schedules were littered by different tax rates in additions to varying descriptions across different State schedules. Simplification required fewer rates and that is what was achieved when VAT was introduced. The Centre went a few steps ahead and introduced excise at a single rate. The outcome was a dramatic reduction in classification disputes. Multiple rates for goods and services are back and will bring with it challenges on classification and consequently avoidable litigation.

Inverted tax structure is most likely outcome of taxing certain goods or services at lower rate. The GST law currently provides grant of refund in context of inverted structure. Only civil construction services have been denied the refund of overflow of input tax credit. Also by taxing services such as transfer of right to use goods and transfer of right in goods at the rate of tax and cess that would have been applicable on supply of such goods, the issues of inverted structure have been overcome in case of such services.

The current abatements have been kept in mind while fixing tax rates on aggregators & air travel and current exemptions maintained, save for the addition of a new exemption to GSTN to overcome the issues faced by GSTN in current regime.

Rates for gold is yet to be notified. Two things deserve a mention here. Firstly, lower rate of tax would encourage better compliance in this sector and secondly in Indian economy gold is not merely perceived as an adornment but effective savings vehicle.

Now with the Government running on their plan, it is for the industry to quickly assess its impact based on the GST rate structure, make their business plans and devise their anti-profiteering strategy. 

The long wait by the industry has been concluded with the GST Council having announced the rates of goods and services in its latest meeting on May 18-19.  Given the stated intention of the Government of not allowing a long lead time to the companies post announcing the rates, this development strongly indicates that Government is serious about meeting the July 1 deadline for the GST implementation date.

During the GST Council meeting held in Srinagar this week, the Finance Minister has announced that States are vigorously working towards the July 1 deadline for the much awaited nation-wide roll-out of GST.  Despite the contrary statements being made by the West Bengal Finance Minister in this regard, based on various developments on rates and rules in this GST Council Meeting, the Government appears to be more ready than ever to achieve the July 1 deadline.

Based on the press conference by the Finance Minister, transportation services are being proposed to be taxed at 5 percent under GST, much to the delight of the transportation services sector and various e-commerce operators engaged in providing a platform for transportation services.

The GST Council has made its intention to tax luxury services at a higher rate quite evident by announcing different rates for services such as hotels, five-star restaurants, etc based on their tariffs and other factors which distinguish luxury services from non-luxury services.  Hotels and five-star restaurants services with tariffs more than INR 5000/-, gambling, admission to cinemas and racing events have been kept at the highest rate being 28 percent.  There is still no clarity on whether such services would also attract levy of an additional compensation cess.  The Council has proposed a graded tax rate structure for other restaurants with small restaurants being taxed at 5 percent, other non-AC restaurants being taxed at 12 percent and AC restaurants being taxed at 18 percent.

With certain areas pending for decision by the GST council after conclusion of today’s meeting held in Srinagar, the next meeting of the Council has been scheduled to be held in New Delhi on June 3.  Some the key areas which would be discussed on June 3 would include GST rates for bio-diesel, biri and cigarettes, footwear, textiles, agricultural implements and gold.

May 18 and 19 are historic days for GST. At Srinagar, the GST Council put out a united front and announced rates of over 1200 goods and services. In a clear break from the current regime, services have also been bracketed into 4 different bands - 5, 12, 18 and 28%.  The underlying theme of rates for goods and services has been a balancing act between necessities and affordabilities.  Essentials are likely to be cheaper in GST and luxuries costlier. However, even in this mix, there are some peculiarities.  Real Estate is likely to be most adversely affected in GST.  Sale of flats will now attract tax at 12% with no refund of overflowing input tax credit. This is already higher than the 6-7% applicable rate even if an abatement for land is provided. With cement at 28%, steel at 18% and works contracts not involving sale of land at 18%, the builders will need to achieve at least 50% value addition if they are to utilise the input taxes.  So we can expect the prices of flats to increase in GST. Banking and financial services are now taxed at 18%.  The experts had recommended a 12% rate for this sector to ensure banking remains affordable.  Coupled with greater requirements for working capital in GST, having a higher rate of GST may have ripple effect through the economy.  On the goods, the rates for a few products such as detergents, shampoo, etc at 28% is surprising. These are everyday use items and may impact the common man.  There is no doubting the intentions of the Policy-makers when the goods and services were classified under GST.  The hope is that the tax authorities will approach classification in the same statesmenly manner and not convert classification into a hotbed of litigation.

Endeavor of GST Council, as we were told in run up to the fitment exercise, was to ensure least disruption and inflation by maintaining GST rates at current effective tax rates; the rates after taking into consideration input tax credits.  

This position is visible in the rates fixed for 1200 odd commodities and services and there are no surprises except for few items like readymade garments, banking, insurance and telecom services being placed in 18 % basket. This 3 % increase in tax rate will lead to higher cost of these services and garments for consumers as there is not much input tax credit for these sectors. All will feel its pinch.  Perhaps, it was necessitated for balancing loss of revenue from goods which are placed in lower tax bracket as compared to their current consolidated tax rate.

The next major area eagerly awaited is the finalization of transition rules.  The hope is that the loss of input tax credit will be minimized and businesses will not have to resort to artificial measures to save loss of tax credit and that, it will not cause  disturbance in economy prior to GST implementation.  

The two day Srinagar meeting of the GST Council has been able to achieve consensus on rates for majority of the goods and services, barring a very few items like textiles, gold etc. for which rates will be decided on the 3rd of June.

The rate structure has come out as a bit of surprise with many items finding place in the 28% rate bracket. On the services front, a four tier rate structure was unheard of. There are services, like five star hotel etc., being taxed at 28% GST. Many of the service tax exemptions available currently have been continued and the RCM list almost remains the same. In some situations where a 5% GST rate has been decided e.g. transport, credit has been restricted to input services, thereby defeating the entire fungibility principle under GST. Except for multiple state return filings for a service provider, resolution of the issue of payment of dual taxes and an enhanced service tax rate, albeit with credit on goods (which has again got restricted for some), it appears that the tax applicability will almost remain the same for service providers, however, the compliance burden increases manifold times.

With the aforesaid rate announcements, the Government has crossed all the bridges for rolling out GST from 1st July, and it seems that the decision would not change. This puts immense pressure upon the industries to speed up their preparation. With rates just out, commercial negotiations and discussions between vendors and customers and rolling out a revised price list post GST in time looks extremely challenging. This is apart from the other preparations on IT that needs to be completed before time. Large IT vendors have still not come out with final GST patches. Clearly, we may see lot of companies unprepared on July 1, specifically SMES, though, there is still time till August 10th to gear up, which is the first reporting date post GST. Needless to say, invoicing in requisite formats will have to happen day 1.

India finally moving on to GST is a very positive development for the economy. However, the structure could have been kept simple and the Government could have avoided multiplicity of rates. Also, if there is time to implement until 1st September, there is unclarity on the urgency shown in implementing considering that many are yet unprepared. Companies should have been given time to determine net tax impact and also ascertain taxability, for which 40 days may not be enough. It is hoped that some extension is granted considering the criticality of being prepared on time qua payment of correct GST and smooth flow of credits.

& Bhadresh Vyas

With the finalization of majority of the GST Rates and GST Rules, the decision making functions of the GST council in the pre implementation period have almost reached an end, barring the 6 rate fitments and the two GST Rules (including the very important Transition Rules) which should be finalized on 3rd June, 2017.

As far as sentiments are concerned the fitment of rates has brought about a mix bag of feelings, with a bull on goods and a rather low on services. Reduction in effective tax incidence for most of the goods as compared to the current regime has been welcomed by the industry at large, with the decrease in tax on Intermediary goods and Capital goods being one among the most merrily accepted change. Conversely, allocation of services amongst four different GST Rates may not have augured well the service sector. Further, increased compliance burden for service providers and assignment of 18% as standard GST rate is being regarded as a step backward for the industry. However as pointed out by the FM, as far as the math behind the tax is concerned, the services are most likely to be indifferent to change in Tax structures, as the effective increase tax rates are likely to be negated by the allowance of GST credit on input side on goods (which is currently unavailable). As per the initial reports a multi-layered tax structure slab has been proposed for Hotel and Restaurant business, which may further add up to the woes of the industry players. On the brighter side, most of the exemptions are likely to be grandfathered in the GST regime, including exemptions for healthcare and education.

Overall with a high positive on goods and a neutral on services, the fitment of rates have been rather satisfactory. 

The timing of this announcement is probably one amongst the most critical thing that needs notice. With only 40 days to GST implementation, organization will now have just enough time to re-calculate and rework their cost sheets to zero down on a final price for their products /services to ensure they are able to decipher the actual cost savings due to GST synergy and accordingly pass on the benefits to the end consumer in the true spirit of GST (while avoiding a default of anti-profiteering clause as well).

The all-powerful GST Council headed by the Hon’ble Finance Minister, Mr. Arun Jaitley met for the fourteenth time to finalise the nuts and bolts of the new GST tax framework. The GST Council has given its approval to 7 sets of Draft Rules and 2 Draft GST Rules sent for legal vetting. The GST Council has broadly approved the GST rates for 1205 items of goods out of 1211 items in 4 tier rate slabs. The Council has also finalised tax rates for all services, except lottery, under the new GST regime. Those services already exempted from tax, such as healthcare and education, will continue to enjoy the concession. Even in the services sector, depending on the nature of service, there are various categorisations that have been made, fitting services into four different categories of rates of 5%, 12%, the standard rate of 18%, and luxury rate of 28%.

Indeed, the efforts of the Government is laudable. As an attempt to keep check on inflation, the tax on goods falling in Consumer Price Index basket like cereals, food items, etc., have been kept on lower side.  But unlike present regime of Service tax, varied categorisation of services along with tax rate as high as 28%, came astonishing to certain specific Industries like 5 star Hotels which plays an important role for Indian tourism. Extensive competition hit telecom Industry which was looking for some respite, has also been placed at 18% slab rate as against 15% at present, though seamless flow of credit will also be available throughout the supply chain. But, classification of services will also now be crucial in GST.

Looking at the series of events and continuous efforts, the Government is keen to bring out GST from envisaged date of July 1, 2017. But there are certain other important areas which needs to be looked into for effective implementation of GST. Rate fitments of certain goods like Gold, textile etc., are still to be decided. Only 7 Draft Rules have been finalised whereas there were 14 Draft Rules available on public domain. Balance Rules are still to be finalised and most importantly, all States has to pass the Model SGST Law at the earliest. GSTN network is under the process of testing and not yet tested by the ultimate users to see how GST compliances viz. Registration, Payment and most importantly, GST Returns to be filed on GSTN in GST regime. Lot of preparation along with GST awareness is required more specifically for the SME/MSME sector for smooth transition to GST. July 1, 2017 still appears to be aggressive target for such a mammoth indirect tax reform since independence. Nonetheless, it would be prudent if the Government announces the effective date of implementation of GST in upcoming GST Council meeting scheduled on June 3, 2017 so as to enable the Industry to prepare well and manage their business activities accordingly.

& Farhad Dalal

Pursuant to the recent meeting of the GST Council, the most awaited concern pertaining to the rate of tax under the new regime, appears to have some visibility. Various supplies have now been categorized under the tax slabs which were agreed in the earlier Council meets i.e.- Nil, 5%, 12%, 18% and 28%. While it appears that the fitment formula, which intended to categorize supplies based on the existing burden of taxes, has been made applicable to most goods, there are some surprises along the way. These would include products being brought under the lower tax rates as well as products classified under the higher tax slabs along with a compensation cess, as applicable. Further, the high-end tax rate of 28% originally reserved for ‘sin goods’ now also covers materials / goods used in construction, cosmetics, toiletries, auto parts etc. However, the deal sweetener here is the NIL or lower rate category, which covers most essential items.       

Extending rate classification to services too, was an unforeseen move. Transitioning from a single rate of service tax, to a four-slab structure (i.e. 5%, 12%, 18% and 28%) would surely not be an easy task. Adding to the tax and state-wise compliance burden, is the task of classifying a service under the applicable service codes.

 It would be pertinent to note that a four-rate classification of supplies, may dilute one of the purpose of GST viz. to be less litigious in nature.

Overall, the above can be summarized as a mixed bag of good and bad news.