Goods and Services Tax (GST), the most critical tax reform that India has been longing for, is finally poised to become a reality. With the finalisation of the rate-bands and most of the rules, Finance Minister Arun Jaitley has reiterated that July 1 will be the roll-out date for the revolutionary tax law.
However, the service rate structure announced seems to be causing apprehension in the minds of service providers and recipients alike.
Under the GST regime, services will be taxed under four rate slabs of 5 percent, 12 percent, 18 percent and 28 percent. This multiple rate structure is a paradigm shift from the current regime, which taxes services at a single rate of 15 percent. The reason behind this move is apparently to ensure that different economic classes are not subject to tax at the same rate.
Considering the nature of the services, various exemptions currently applicable have been maintained. For instance, services provided by educational institutions and healthcare services from clinical establishments, authorised medical practitioners and paramedics have been exempt from GST.
Services such as transport of goods by air, road and railways as well as cab aggregators’ services have been kept under the 5 percent slab. The categorisation of such services under the lower rate slab has been done keeping in view that their main input is petroleum, which is outside the GST regime and credit of the same will not be available.
Restaurants without air-conditioning or central heating facility and no liquor licence will fall under the 12 percent tax bracket, while those with these elements will be taxed at 18 percent. Construction services relating to a complex, building or civil structure for sale to a buyer will be taxed at the rate of 12 percent. Interestingly, at present, food and drinks served by restaurants and works contract activities are generally subject to a dual levy of both value-added tax, in accordance with the respective state legislation, as well as service tax at an abated value. A single levy is, therefore, expected to simplify the taxing of such transactions.
Other services that would be charged a tax rate of 18 percent include IT, telecom and financial services. A higher rate of 28 percent has been imposed on services such as admission to entertainment events, theme parks, race courses, 5-star hotels, etc. The imposition of GST at 18 percent and 28 percent, an increase from the currently applicable 15 percent, has been backed by the government, stating that additional input credits would be available and the levy of other state specific taxes such as entertainment tax would be eliminated.
A holistic review of the service rate schedule indicates the government has endeavored to strike a balance between mitigating the anticipated inflationary effect of GST and maintaining a revenue neutral rate. But the four rate slabs can lead to disputes on the classification of services under the different slabs.
In most cases, a reduction in the overall tax incidence has been justified either by the social relevance of the service in question, or a reduction in the availability of input credit. Conversely, an increase is backed by the availability of additional input credit or the luxurious nature of the service in question.
Theoretically, the government’s logic appears flawless; however, the impact on end customers will be greatly dependent on the successful implementation of the anti-profiteering clause. This clause mandates service providers should pass on the benefit of additional credit available to them, on account of GST, to customers through a reduction in prices. Despite the clause in the GST Act passed by Parliament, there is no clear picture regarding its practical functionality.
Another aspect that needs to be factored here is the additional compliance burden and the cost attached to it. Though GST facilitates a seamless flow of credit that will help in reducing its cost, it exponentially increases the compliance burden on service providers. The concept of centralised registration presently prevalent in the service industry has been done away with under GST. Consequently, a service provider is essentially required to seek registration in all states where the service is provided.
This is expected to increase the cost of services provided by them. Further, the availability of credit, too, is directly dependent on correct and cent percent compliance.
An increase in tax rate can only be justified if there is indeed a reduction in cost and if the benefit of this reduction is passed on to the end consumer. Though it is true that with the roll-out of GST more input credit would be available to service providers, one will have to wait and see if this has enough of an impact on the cost of services, to surpass the delta created due to increased compliance cost.
It is apparent the government is moving at an unprecedented pace in working towards a July 2017 roll-out. Nonetheless, there is much uncertainty and apprehension in the minds of the tax payer and the consumer. Given that GST will bring about a monumental change in the country’s tax structure, it would take time and efforts from the industry and the government alike to get accustomed to the new regime and actually reap the benefits of the ‘one nation, one tax’ policy.
The author is Partner – Indirect Tax with PwC India(With inputs from Vidushi Gupta)