It’s good that India wants just two GST slabs⁠ but it has to ensure it doesn’t hurt consumers

• Many everyday use products -- from pens to cartons, bags, plastics and cards, stand to get dearer as the government looks to merge the 12% and 18% GST rates.
• The biggest reason for such rationalisation is correction in the inverted duty structure that leads to difficulties in claiming the net input tax credit.
• The government is likely to move to just two tax slabs of 5% and 18% over the next 6-18 months.

The Indian government wants fewer tax slabs under the goods and services tax (GST) regime. Recently, Chief Economic Advisor K V Subramanian said that GST could be turned into a three-rate structure by merging two existing tax slabs.

However, experts say that it could also be down to just two slabs, eventually. And the latest move to increase the GST to 18% on pens, cartons, bags, plastics and cards, is part of that plan.

Though fewer slabs will make it easier for businesses to pay taxes, it could lead to some key products and services getting more expensive and that is an issue, which the government must be wary of.

Current GST Rate Slabs

In the 45th GST Council meeting held on Friday last week, some products that were earlier taxed at 5% or 12%, including cartons, boxes, bags, packing containers of paper, plastic products, metal ores, scented sweet supari, cards, catalogue, and printed material, were moved to 18%, along with other products.

Most of these everyday items are used by even those who are not financially well off. And a higher tax is the last thing they need. “What is the logic of taxing them [cardboard boxes] at 18%. Except for rationalisation, I cannot think of any other reason for change in these rates,” said Sandeep Chilana, managing partner at Chilana & Chilana Associates.

Some rates, however, such as for retro fitment kits for vehicles used by the disabled, fortified rice kernels, medicine Keytruda for treatment of cancer and biodiesel supplied to oil marketing companies, among others, were reduced to 5%.

Here’s why having fewer tax slabs is good

The development comes as the government looks to move to a twin-tax structure under the GST regime, Bipin Sapra, tax partner at advisory firm EY told Business Insider India in a video interaction. The biggest reason for such rationalisation, he said, is correction in the inverted duty structure that leads to difficulties in claiming the net input tax credit.

An inverted duty structure is a situation where inputs or raw materials are taxed higher than the output or finished products for sale.

“But ultimately your product is becoming costlier at some point because once the (input tax) credit gets utilised, what is the net amount of tax that you have added to the product, would need to be seen,” said Sapra.

He also expected more such rationalisations to happen in the future. At present, GST is levied under five slabs for services, and under seven slab rates for goods, with the tax on gold that is kept at 3% and rough precious and semi-precious stones that are placed at a special rate of 0.25% under GST.

But that may change soon as the government is likely to move to just two tax slabs of 5% and 18% over the next 6-18 months, said Sapra. “We will see more of this happening in the coming days, because they [the government] are ultimately trying to move to two rates of 5% and 18%,” he said.

So, most of the items in the 12% GST rate category are likely to move up to 18%, while some may be brought down to 5%. “But, predominantly, whatever we see at 12%, based on the discussions I have had with policymakers, will ultimately move to 18%. That is the broad reason why we are seeing this. My view will be within 6-18 months, we will move to a two-rate regime,” he said.

Further, moving certain products to the higher 18% tax slab also seems unfair to customers and businesses during the pandemic, said Anita Rastogi, partner - GST and indirect taxes at PwC.

“I do not think 18% is the right rate, if we want to do a two-slab rate. It should either be 15% or 16%, because 18% is not the genuine correct rate in today’s scenario,” she said. “There are a lot of factors that need to be re-considered post the pandemic, [such as] the situation in which the businesses are and also the purchasing power of the people. So, if at all the rate fitment committee is discussing it, we really need to urge them to relook at the rates at which they want to do it.”

Abhishek Rastogi, partner - indirect taxes at law firm Khaitan & Co., concurred. “16% is ideal. There may be some anti-profiteering issues coming down from 18% to 16%, but 16% is the best rate. If that rate doesn’t suit in terms of revenue, then 5% can go up to 6%,” he said.

Since the rationalisation for change in the rates was not given by the GST Council, Sapra said that it would be helpful if the committee came up with a vision statement to give more clarity to businesses, instead of doing patchwork to solve the issues of tax cascading, inverted duty structure and perceived revenue loss.

“Right now, we believe that the GST council is doing what it needs to (do) to keep the GST running and solve the problems the industry or state governments throw at it, but we need more clarity and vision from the GST council,” he said.

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