The initial idea of the goods and services tax (GST) was to have a uniform tax rate, simplify the compliance structure and thereby curb tax evasion. However, with every meeting of the GST Council, these objectives seem to get more distant.
For instance, contrary to expectations, four tax slabs were announced for services, which made the already complex GST more complicated. Also, exemptions on a large number of services have been retained, at least for now—a contradiction to the finance minister’s statements of keeping minimal exemptions under GST.
Items like alcohol and petroleum, which generate large revenues for states, are currently out of the ambit of GST. Exclusion of these items and real estate, a sector notorious for money laundering, defeats the purpose of GST.
One hopes that what happened in the case of services exemptions doesn’t get repeated with goods too, and that tax exemptions and concessions that are currently enjoyed by the manufacturing sector would be a thing of the past.
An analysis by Gautam Khattar, partner, and Abhishek Singhania, manager (indirect tax) at PwC India, outlined the current tax exemptions and concessions, adding that these benefits will cease to exist once GST is implemented (see table).
Evaluating the impact of waning tax benefits, Khattar said that despite the proposed tax rate being lower for the gems and jewellery sector, it is likely to be higher than the tax rate under the current regime. Also, removal of aforementioned benefits would result in higher prices for these products.
Similarly, prices of leather products, including footwear, will inch up.
As far as the textile sector is concerned, the government has not proposed any GST rate yet. “However, considering the (annual turnover) threshold limit of GST at Rs20 lakh, most people engaged in manufacture of fabrics or dying, printing, traders engaged in purchase and sale of fabrics, will be required to obtain registration and pay GST," added Khattar.
Apart from item-wise exemptions, clarity is required on what happens to area-based excise exemptions that companies enjoy under the current tax regime, especially pharmaceutical firms.
Meanwhile, a decision on pending GST rules and tax rates for six crucial and contentious items, including gold, is likely to be reached on 3 June.
The clamour to retain tax exemptions by various industry associations started getting louder as the mid-May GST meeting approached. It now remains to be seen whether, in the case of goods exemptions, the government gives in to the pressure again.