GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Anatomy of GST rates
At classification level around one-fifth of the items are in GST exempted category, around one-fifth under 28% rate category and one-sixth under 12% category.

Target PT Target PT

Most of the item shall come under 18% tax rate. Most of the food items have been exempted or fetch lowest rate of 5% which is important given high poor percentage in society.

Within services category luxury services and services considered to be anti-social like gambling are under 28% category.
Under the goods category, petroleum products, alcohol, electricity, real estate and several food subcomponents have been kept outside GST ambit.
Under services, health and education, amongst some others, have been excluded.
Four products luxury cars, aerated drinks, tobacco and related 'paan' products would also fetch additional Cess.

The council has recently revised rates on 66 items such as pickles, sauces, fruit preserves, insulin, cashew nuts, insulin, school bags, colouring books, notebooks, printers, cutlery, agarbattis and cinema tickets, following representations from industry.

 Restaurants, manufacturers and traders having a turnover of up to Rs 75 lakh can avail of the composition scheme with lower rates of 5%, 2% and 1%, respectively, with lower compliance, against Rs 50 lakh previously. A GST rate of 5% will be applicable on outsourcing of manufacturing or job work in textiles and the gems and jewellery sector. Bleaching and cleaning of human hair, a big industry in Midnapore, will not face any tax.


Implications on various sectors of GST ratesEstimates suggest that there is likely to be no upward impact on inflation. Rather, if tax cuts are passed on and the input tax credit mechanism runs with part efficiency, GST could help lower the inflation rate by 10-50bps. In terms of growth impact, the near-term could be messy, with adjustment costs for the private sector grappling with inter-sector implications. Service providers, in particular, are likely to face an increased (and more complex) tax burden. Over the medium-term, the impact on overall growth is unambiguously positive.

The progressive tax structure would make sure that states do not face any revenue shortfall due to GST. It is likely that more comprehensive service tax coverage increases their revenues. Then, if any shortfall does remain, the Centre will take care of it.

Moreover, with a view to keep inflation under check, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate. The cess is expected to provide additional resources to the central government to compensate states for losses incurred. This will be based on the compensation formula.

Impact on Important sectors

  • Construction and Infrastructure
    The composite supply of works contract in this sector will fall under the 18% GST rate with full input tax credit (ITC). The GST rate may seem higher than the current tax rates as the effective tax incidence for an average construction contract in the pre-GST era is typically in the range of 11-18%, which is lower in comparison to the announced GST rate of 18%. The difference is more pronounced for the construction services which fall under the service tax exemption category.
    Despite higher rates, the sector is likely to benefit under GST regime from the availability of input tax credit. As under the current tax regime the benefit of input tax paid is not fully available, the benefits arising out of input tax credit on the raw-materials available under the GST regime would result in an overall neutral tax incidence for construction services.
    Cement prices are expected to go up marginally, as the GST Council has announced a tax rate of 28 per cent on the product. The cement industry says the rate is above what was expected, and the increase will most likely be passed on to consumers.
  • Hospitality sector
    Goods and Services Tax (GST) rate levy on the hospitality sector is within the range of 2 to 28 %. hoteliers have termed it as a "killer step" for the tourism and hospitality industry, which is already reeling under rising costs of basic commodities, labour and the recent liquor ban on highways. It will certainly have an adverse effect on the industry, particularly for the mid and high category hotels which will fall under the 18 and 28 % GST rate.
  • Engineering, Capital Goods & Power Equipment
    Introduction of GST is expected to improve the prospects of engineering, capital goods and power equipment (ECPE) sector by simplifying the tax structure. The complexity in this sector is that companies are involved simultaneously in manufacturing of goods and rendering of services. A comprehensive tax like GST would combine the state and central taxes in a single structure and the tax credit would be available at each stage of production and final sale so that double taxation could be avoided. This would bring in more cost competitiveness to the domestic players.
  • Automobile sector
    Currently taxes paid by car manufacturers are 27.6% to max 45.1% and the GST rates on automobile sector would be 28%. So rates seem to be revenue neutral though gains would occur from easy compliance and less cascading effect.

    Criticism of rates according to some experts

  • It compromises on simplicity. The multiplicity of tax rates for services will add complexity to the compliance in the GST regime.
  • Around 19% of services have been under the highest slab of 28% which caters to daily needs of middle class. Thus the middle class will now have to bear the brunt of higher prices.

A well-designed GST in India is expected to simplify and rationalize the current indirect tax regime, eliminate tax cascading and put the Indian economy on high-growth trajectory. The proposed GST levy may potentially impact both manufacturing and services sector for the entire value chain of operations, namely procurement, manufacturing, distribution, warehousing, sales, and pricing.


© 2020 Basix Education. All Rights Reserved