GST rates: Centre, states reach broad consensus, another 40% slab to be added

New Delhi: The Centre and the states have managed a broad consensus on the tax rates under the goods and services tax (GST) after the Centre agreed to add an additional slab of 40% in the rate structure of this ambitious tax reform, said a person familiar with the development.

The fourth meeting of the GST Council is underway in New Delhi as the states and the Centre look to resolve contentious issues to pave the way for implementation of GST from 1 April 2017.

The Centre had proposed a multi-tier rate structure in the previous meeting wherein it had proposed that gold will be taxed at 4%, essential commodities where no excise duty is levied but a low rate of value-added tax is levied at 6%, two standard rates of 12% and 18% where a majority of the items will be taxed, a high rate of 26% for packaged consumer goods and 26% plus cess for luxury items and sin goods such as luxury cars, tobacco, pan masala and carbonated drinks. It had proposed using these cess proceeds along with the funds collected under the green energy cess to compensate states for losses arising from the transition to GST.

But a few states had opposed this rate structure and the levy of cess. They had pointed out that the higher rate of 26% could be further increased as the total tax incidence at present on some of these items envisaged was much higher in the current tax regime. Voicing his opposition, Kerala finance minister Thomas Isaac, in a column in The Indian Express, had written, “The chief economic adviser’s report had recommended the demerit goods rate of 40%. It should be reintroduced in the structure and the states should be given flexibility in determining the demerit goods.”

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Chief economic advisor to the finance ministry, Arvind Subramanian, in his report last year, had recommended that the so-called demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products should be taxed at a higher rate of 40%.

Mint couldn’t immediately ascertain what items are proposed to be taxed at the higher slab of 40% as well as what will happen to the cess proposed by the Centre on some of these demerit items to compensate states.