GST - The Rate of Tax Debate

The issue largely has arisen out of marketing and product mismatch.  The marketing of GST with the slogan ‘one nation – one tax’ was very effective and the public at large and even large businesses believed that there would be one GST rate, which unfortunately is not practical.  It is impossible to implement GST with one rate, given the vagaries in the rates under Central Excise and VAT Laws.

The following table brings out the general key differences in existing rates between Central and State levies:

Product Excise Duty VAT
Cooked food items Exempt Taxable
Tea including tea waste Exempt Taxable
Preparation for infant use in unit containers Exempt Taxable
Biscuits where RSP does not exceed Rs.100/- per kg. Exempt Taxable
Tractor Exempt Taxable
Ice-cream and non-alcoholic  beverages prepared and dispensed by vending machine Exempt Taxable
Sweetmeats, mixtures and similar edible preparations Exempt Taxable
Concrete Mix or RMC at site Exempt Taxable
Supplies against ICB Exempt Taxable
Supplies for power projects Exempt Taxable
Newsprint in reels Exempt Taxable
Special purpose motor vehicles Exempt Taxable
Vehicles designed for transport of more than 6 persons excluding driver Exempt Taxable
Vehicles designed for transport of compressed or liquefied gases falling under 8704 Exempt Taxable
Three wheeled motor vehicles Exempt Taxable
Customized software, audio cassettes Exempt Taxable

*The position is different in some States.

The challenges are broadly as under:-

Pruning of Exemptions:

(i) The list of goods exempted by the State for the purpose of VAT is much lower than the list of goods that are exempted by the Centre for the purpose of excise duty and hence if the Central Government list of exemption has to be pruned down to the State List, a massive set of goods would come into the ambit of GST and hence the rate at which they are taxed is a critical decision.

(ii) Even though major attempts were made in 2011 to bring in a concept of 2% excise duty without cenvat, for many items, excise law still deals with a number of exemptions.

(iii) In 2004, excise duty was withdrawn on tractors on the premise that the withdrawal of duty would benefit the farmers.  On the contrary, the prices of tractors went up due to non-availability of cenvat credit benefit.  Most States levy VAT on tractors.  Similarly, wind energy items are exempt from excise but are liable to VAT. Would the Centre levy GST on these items like the States or convince the States to exempt these items?

Bullion and Jewellery:

(i) The VAT rate on bullion and jewellery is at 1% except Kerala which levies a higher rate. Only now the Central Government has imposed excise duty on jewellery and that too at a rate of 1%.

(ii) If this sector is sought to be taxed at say 6% or 4%, it is not something which would be so easily accepted given the fact that even a 1% levy of excise duty could not be implemented without a paradigm shift from ‘removal’ to ‘sale’ and a manifold increase in the threshold limits for SSI exemption. In a GST regime the threshold of exemption is likely to be Rs.20 lakhs.

Luxury Goods:

(i) The VAT regime had the peak rate as a residual category. The standard rate of excise duty did not have any link to the concept of luxury or elitist consumption. India would be seen in poor light globally if an abnormal rate of GST at 26% is contemplated on the so called ‘luxury goods’

(ii) When the entire country had more or less concluded that the peak rate could be 18% and some believed that it could be slightly more, reports indicating that nearly 25% of the products may attract 26% is worrying.  The benefits of GST through simplification, lower rates, higher compliance, equitable distribution of taxes and increase in tax base are all likely to be lost if the number of items in the 26% rate is higher and is based on the concept of ‘luxury’.

Goods Vs. Services:

(i) Multiple rates and that too 6% / 12% / 18% / 26% would also mean that as a natural corollary, there would be difference in rates between goods and services.

(ii) When the consumer is unhappy with the existing 15% (service tax + SBC + KKC) on services and is dreading a rate of 18%, it is unlikely that the GST Council would even think of a 26% rate on services.  Even if services are at say 18% and some goods are at 6% / 12% / 26%, the distinction between goods and services and the eternal debate would be back in full form.

(iii) One had hoped that the fight between goods and services would get over on implementation of GST, but if the 26% list goes up beyond the so called known ‘sin products’, classification disputes between goods and services would arise.  The definition of ‘goods’ and ‘services’ in the Model Law are likely to complicate the issue further. Different set of rules for place of supply of goods and place of supply of services with a rate of tax distinction would only add to the misery.

Issues for States:

(i) It would also be a challenge politically for a State to justify say 12% or 18% on hotels and restaurants.  Currently, Tamil Nadu levies VAT at the rate of 2% on hotels and restaurants.  Karnataka has a compounding rate of 5% for restaurants which do not serve liquor.  Most States have similarly lower rates for hotels.

(ii) It would be politically a very big challenge for a State to impose 12% or 18% on hotels and restaurants which would indicate a steep tax rate hike.  The argument that restaurants pay service tax at 6% in addition to VAT, is only relevant for air-conditioned restaurants and even in that segment, the effective rate jumps from say 8% to 12% or 18%.

(iii) Apart from general product exemptions, some States have exemption for specific products linked with turnover limits. (Tamil Nadu exempts chillies, chilly powder, coriander, coriander powder, turmeric, turmeric powder, etc. where the total turnover of a dealer does not exceed Rs.300 crores; pulses and grams where the turnover of the dealer does not exceed Rs.500 crores;) Other States have different types of exemptions and politically it would not be easy to tax these items given the fact that input tax credit is irrelevant for these sectors.

Cess to fund Compensation:

(i) The idea to impose cess over and above the 26% GST rate to fund compensation needs to be rejected outright. When States expressed their fear of losses on account of GST, the Centre gave multiple assurances and walked the extra mile to guarantee compensation through the Constitution itself.

(ii) Section 18 of the 101st Constitution Amendment Act, 2016 provides that Parliament shall by law on the recommendation of the GST Council provide for compensation to the States for loss of revenue arising on account of GST implementation.

(iii) The GST Council itself can recommend only GST rates and the cesses that may be subsumed in the GST.  The Council cannot recommend a levy of cess over and above GST to fund compensation.

(iv) It is presumed that the Centre had done its calculations and based on the confidence of increased revenue and taking a lead role in implementing a major tax reform, the Centre assured the States on compensation. This presumption is based on the fact that the CGST would be comprehensive in its scope; SSI exemption would be scaled down and the Centre would tax every person in the supply chain as against only manufacturers.  If this presumption was the basis for the assurance, it is quite surprising that cess should even be contemplated as a levy over and above GST for funding compensation.  When the Centre is confident that there would not be a necessity for compensation and the claim may be restricted to few States, the Centre should use available resources and budgetary support for compensation as against a levy of cess over and above GST.


It would not be economically feasible to have a single rate for GST. However, having too many rates would only complicate the issue. A delicate balance has to be struck. The fact that the meeting of the Council on rates was inconclusive and clarity would emerge in November indicates that a healthy debate has indeed commenced and various options are being considered.  Industry Associations have slowly understood the ramifications and the next few weeks would usher in representations for exemptions and lower rates. It may not be easy to outright reject the representations on lower rates and exemptions since it is the business community which understands the market and the impact of tax rates. The GST benefits would take time to translate and one cannot expect prices of goods to fall immediately whereas the prices of services would go up immediately.