Changes in tax rates decided by the GST Board

The Goods and Services Tax (GST) Board, at its 47th meeting held last week, undertook a series of rate changes as part of the correction of the reverse duty structure, the removal of certain exemptions in what could be a precursor to a global adjustment of brackets and tax rate rationalization in the future.

As part of the changes, which are expected to affect consumers at the most basic level, the GST exemption has been removed from “pre-packaged and labelled” retail packages which will include food products such as curds, lassi , puffed rice, wheat flour, buttermilk, but items sold in bulk or without a label remain exempt. The rate changes will take effect on July 18.

What were the changes announced by the GST Council?

The GST Council discussed recommendations from four ministerial panels – on rate rationalization, on the movement of gold and precious stones, system reforms, and casinos, horse racing and online gambling.

The Group of Ministers (GoM) report on rate rationalization, led by Karnataka Chief Minister Basavaraj Bommai, was an interim report addressing the correction of the inverted duty structure and removal of exemptions. The GoM has been given a three-month extension to continue work on tax bracket changes and rate streamlining.

The GoM on Casinos, Horse Racing and Lotteries had finalized a uniform tax of 28% across all three categories, but has now been given an additional 15 days to consider its recommendations which will then be taken up at the next meeting of the GoM. GST Council, likely to be held in the first week of August in Madurai.

Correcting the reverse duty structure results in higher tariffs for household items such as LED lamps, printing/drawing ink, electric pumps, Tetra Pak from 12% to 18%, for solar water heaters, finished leather at 12% by 5% and for cut and polished diamonds at 1.5% instead of 0.25%. Among the services, an 18% GST will be levied for the issuance of cheques. Exemptions will also be removed for pre-packaged and pre-labeled food products such as cereals, curds, lassi, paneer, jaggery, wheat flour, puffed rice, buttermilk and meat/fish (except fresh and frozen ). These food products will now be taxed at 5%, in the same way as branded products. In addition, refunds of accrued input tax credit will not be allowed on products such as edible oil and charcoal.

Exemptions have also been removed for room rents: 12% GST will now be levied on hotel rooms with rent up to Rs 1,000 per day and 5% GST will be levied on hotel room rent. hospital rooms above 5,000 rupees per day (excluding ICU). The GST rate was reduced for ostomy/braces from 12% to 5% and freight and passenger cable car transportation from 18% to 5% (with input tax credit).

The GoM on System Reforms has suggested additional measures for physical verification at check-in for high-risk taxpayers, including biometric authentication, geo-fencing, use of electricity data and time monitoring. real bank accounts. Compulsory generation of electronic invoices by states for intra-state transport of gold and precious stones with a minimum threshold of Rs 2 lakh was also approved.

These compliance measures and rate changes are expected to generate revenue of Rs 15,000 crore within a year, officials said.

Why were the rate changes undertaken?

Since the introduction of the GST in July 2017, several tariff revisions have been undertaken affecting the revenue stream which has been aggravated by the pandemic. The rate rationalization measures are also important given that the compensation mechanism guaranteed to states for five years for revenue losses resulting from the implementation of the GST ended in June and the Council took no no decision to extend it despite at least a dozen states requesting its extension. Despite a slight increase in GST revenue, experts say states heavily dependent on compensation may find FY23 to be a tough year.

There were also concerns about disputes and lost revenue that led to the removal of exemptions from prepackaged items. Some companies have abused the exemption provision for unlabeled food products by not registering them. For example, it was learned that there were concerns that a branded rice maker was selling items with a similar-sounding label but had not registered it as a trademark and therefore was selling it in a exempt category.

Last year, noting the tendency for revenues to fall below revenue-neutral rate levels, the GST Board decided to consider a range of measures including tariff rationalizations to correct the fee structure reversed and the redesign of the tariff structure in the future to increase revenues. The move came after four years of GST rollout, with recognition that a series of rate cuts over those years covering more than 500 items had resulted in strain on central and state government finances with buoyancy revenue lower than forecast. The GST Board within a year of the July 2017 rollout had reduced rates. Rate reductions on over 350 items out of a total of 1,211 items in the five major categories of zero, 5%, 12%, 18% and 28% under GST are estimated to have resulted in a revenue loss of approximately $70 000 rupees. crore in a year.

An inverted duty structure occurs when taxes on the output or final product are lower than input taxes, creating an inverse accumulation of input tax credit that, in most cases, must be refunded. For sectors such as mobiles and footwear, the reverse duty structure resulted in refunds amounting to Rs 5,500 crore and Rs 2,000 crore respectively.

The reverse fee structure has been corrected for mobiles (March 2020) and shoes (September 2021). It was also decided to correct it for textiles in September 2021, but was later withdrawn at a specially convened agenda meeting in December 2021. The GoM on rate rationalization was then given the task additional to examine the inversion in textiles with other sectors. including utensils, crockery, tractors, pharmaceuticals, agarbatti, some agricultural machinery, etc.

What has been the decline in the revenue neutrality rate and what is the revenue position?

The committee headed by the then chief economic adviser, Arvind Subramanian, was of the opinion that the tax neutrality rate range should be between 15 and 15.5% (Center and States combined). This in the context of a two-rate structure, a standard rate close to the RNR at which the maximum tax base would be imposed; and a higher rate of demerit or sin. A September 2019 report by the Reserve Bank of India (RBI) noted that rate rationalization by the GST Board had reduced the effective weighted average rate of GST from 14.4% at the time of its inception to 11, 6%.

According to the latest Council Shared Revenue figures, the average gap for all India between protected revenue and gross revenue of SGST after settlement was 27.2% in 2021-22 compared to 37.9% in 2020- 21. In 2021-22, only five of the 31 states/UTs – Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim – recorded revenue growth above the protected income rate for states under GST. Pondicherry, Punjab, Uttarakhand, Himachal Pradesh and Chhattisgarh recorded the highest income gap between sheltered income and gross state GST income after settlement in 2021-22.

What will be the impact on consumers?

Tariff hikes for daily use items such as LED lamps and packaged food items such as wheat flour, paneer, curd, lassi are expected to drive price hikes by businesses and heighten concerns inflationary. A tax rate of 12% for hotels below the rate of Rs 1,000/day is expected to affect the tourism segment in non-metropolitan cities, state government officials have said. However, the headline retail inflation rate based on the consumer price index should not be greatly affected as the weighting of these items is low in the index.

Newsletter | Click to get the best explainers of the day delivered to your inbox

“It is unlikely to have a significant impact on inflation. Some of these items such as spoons, knives are not purchased regularly and some of these items have a very low weight in the CPI unlike items such as petrol/diesel which have a higher weight in the index Hotels for accommodation have a weight of 0.00904 in the CPI, even though we assume that all hotels are below the tariff of Rs 1,000/day, a 12% increase in GST will result in a 0.11 basis point increase If we assume that all light bulbs/tube lamps are LED, this will be a 0.97 basis point increase CPI inflation Curd could see an increase of 0.47 basis points, so it is unlikely to push CPI inflation significantly,” said Devendra Kumar Pant, Chief Economist, India Ratings.

Assess Goods and services
5% to 12%
  • Solar water heater and system
  • Prepared/finished leather/chamois leather/composite leathers
  • Work related to the manufacture of leather goods and footwear
  • Contract works provided to Central and State Governments, Union Territories and Local Authorities primarily involving earthworks and their sub-contracts
  • Oil/Coal Bed Methane
12% to 18%
  • Printing, writing or drawing ink
  • Sharp bladed knives, letter openers, pencil sharpeners and their blades, spoons, forks, ladles, skimmers, cake shovels, etc.
  • Lamps, luminaires and LED luminaires, their printed circuit board of metal
  • Tetra Pack
  • Motorized pumps
  • Works contract for roads, bridges, railways, metro, sewage treatment plant, crematorium, etc.
  • Machines for cleaning, sorting or grading seeds, cereals, legumes, eggs, fruits or other agricultural products and their parts, milking machines and dairy machines.
0.25% to 1.5%
  • Cut and polished diamonds
12% to 5%
  • Ostomy appliances, Orthopedic appliances — splints and other fracture appliances; artificial body parts; other devices that are worn or transported, or implanted in the body, to compensate for a defect or disability; intraocular lens
18% to 5%
  • Transport of goods and people by ski lift (with upstream tax credit)
18% to 12%
  • Truck rental/freight transport where the cost of fuel is included
Exemptions to withdraw
0% to 18%
  • Checks, lost or in book
0% to 12%
  • Hydrographic or similar charts and maps of all kinds, including atlases, wall maps, topographical plans and globes, printed matter
  • Hotel accommodation up to Rs 1000/day