NEW DELHI: The government has decided to take a gradual approach to do away with exemptions available under the current indirect tax regime while ushering in GST in a phased manner to ensure the tax reforms don’t hit multiple hurdles.
While some tax experts and economists have questioned the rationale for a multi-slab mechanism for goods as well as services, sources in the government said that a four-rate structure was needed to ensure that GST implementation does not stoke inflation. In fact, the Centre has advised states during deliberations not to look at GST as an opportunity to implement all reforms at one go. The maze of central and state tax regimes would make it difficult to do away with all exemptions and opt for one-rate structure at one go.
The GST Council – comprising state finance ministers and headed by Union finance minister Arun Jaitley – has agreed to four slabs of 5%, 12%, 18% and 28% and, contrary to expectations, even opted for multiple rates for services, where a two-tier structure was being talked about. “Multiple rates of services will bring complexity in interpretation and classification, leading to tax disputes,” said Bipin Sapra, tax partner at EY India.
There is the added fear of the government succumbing to pressure from other lobby groups and offering some concessions, which may end up creating more rates.
While experts would want even products such as biscuits or hawai chappals and designer shoes to face the same levy , realising the political imperatives, the government has decided to make a distinction. “Glucose biscuits serve a nutritional purpose for one segment of the population, so you can’t expect it to attract the same levy as high-end cookies,” explained a minister in the Narendra Modi government.
But it is not just rates.When it comes to doing away with exemptions for services, the government has opted to retain almost all of them, for the time being, despite pressure from the revenue service officers to “clean up” the system. “You don’t want to create enemies all around you so that the larger reform runs into trouble,” explained a source.
The government is looking to usher in GST over the next few months and, once the new system stabilises, then expand the scope, starting with petroleum where an annual review from exemption is available. In the next stage, a review of the rate structure may take place but there is no time frame that has been suggested.