India’s goods and ser vices tax (GST) journey is in its critical phase with the GST Council de bating
important is sues such as rate structure, administrative ease and the GST law. Multiple rate structure is
the pragmatic way for ward, and aligned to the re port by the com mit tee headed by the chief economic advisor. While the debate around what will fall in which rate basket continues, it is important we have con sis
tent classification across states to avoid is sues.
The emerging rate structure is four per cent, six per cent, 12 per cent, 18 per cent and 26 per cent,
and the principle ap pears to be such that goods that currently have an effective in direct tax rate structure
(value added tax, excise, central sales tax included) equal to or closer to these rate buckets will tend
to fall in those rate buckets. The idea is to maintain the cur rent effective in direct rate in the new GST
rate structure with some up side in GST chain due to lower cascading. The 26 per cent peak rate basket
means goods with existing effective in direct tax in that range are likely to be covered here. With 40 per
cent rate structure, only luxury and demerit goods could have been covered there and the rest could have
been at 18 per cent or be low and would be more beneficial for industry leading to lowering of prices.
Luxury and demerit goods are also expected to be in this peak rate basket. In cases where the existing
effective in direct taxes on such goods are more than 26 per cent, say, hypothetically 46 per cent, the
delta per cent age of additional 20 can potentially be ap plied through a cess mechanism. Cess in such
cases is likely to be through Article 271 route, which the Centre will apply. The jury is still not out on this
cess mechanism and may get clarified in the next Council meeting.
As a concept, cess is avoid able and industry will not be happy as it will tend to complicate the GST
system. Till date, the idea has been to merge all cesses on goods and services within GST and al low credit
through the chain. The cess compulsion seems to have emerged as a compensation mechanism for Centre
in case states need compensation under GST. The other alternative will be to increase GST peak rate
beyond 26 per cent, which may be cleaner, but the quantum of such in crease be comes critical. Bet ter tax
compliance under the new regime is some thing that seems to have been underestimated, both under
GST and in come tax un less the revenue buoyancy expectations are proved wrong. So, a better idea would
have been to wait and watch in the initial years.