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4-tier GST rate may lead to classification disputes : Report

4 tier gst

GST Council had decided to fix a four-tier rate structure for GST key highlights of which are as follows

  • The four bands of tax rates have been fixed at 5 percent, 12 percent, 18 percent and 28 percent.
  • Also, another category of tax between 40 percent and 65 percent will be imposed on luxury goods like high-end cars, pan masala, aerated drinks and tobacco products.
  • Food grains will be zero-rated to insulate people from inflationary pressures.
  • Most white goods, like washing machines, air conditioners, refrigerators, shampoo, shaving stuff and soap, will be taxed at 28 percent (with riders). The current levy varies between nil tax to 30-31 percent. The rider has been set as there are several items which are used by the lower middle class.
  • A decision has also been taken to levy a cess in order to raise funds to compensate states for the revenue losses they will incur.

GST rates classification

A new study indicates that the four-tier GST rate structure is prone and may lead to a number of classification disputes with tendency among businesses to demand lower rate for their goods or services, says a research paper.

“Present discussion on two standard GST rates (12 percent and 18 percent), a lower rate (5 percent) and a higher rate (28 percent) in addition to exemptions will make the design of GST complicated and increase the cost of compliance as well as cost of tax administration,” said NIPFP associate professor Sacchidananda Mukherjee.

“It is expected that, if accepted, the proposal will open up floodgates of classification disputes and there will be always be a tendency among businesses to demand lower rate for their good or service,” he said in the paper posted on NIPFP website.

Voices are being raised already to put plantation crops, labour intensive manufacturing, infrastructure inputs and air fares under lower tax bracket, he said. “It is expected that the higher the differences among the tax rates the larger will be the scope for litigation. The benefits of removal of cascading of taxes will be balanced by higher cost of compliance, as a result the expected benefits of introduction of GST may not be achieved,” Mukherjee noted.

The National Institute of Public Finance and Policy (NIPFP) economist pointed out there is discussion in the GST Council that there will be a separate cess on demerit goods and environmentally harmful goods. “The objective behind imposition of cess is to generate revenue to compensate the states on account of any revenue loss due to introduction of GST during first five years of implementation of GST. It is not clear whether the cess will be imposed with a sunset clause or it will continue as an additional source of revenue for the Central Government,” Mukherjee said.

The imposition of cess without provision for input tax credit (like Swachh Bharat Cess) will result in cascading of taxes and it will go against the fundamental advantage of introducing GST, he added. “Earlier, opposition parties in the Parliament opposed imposition of 1 percent additional CST-type tax on inter-state movement of goods, as it would have resulted in substantial cascading of taxes. “It is expected that the proposal to levy cess will receive similar opposition in the Parliament when the recommendations of the Council are taken up for approval,” Mukherjee said.

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