The GST rate rationalisation is now based on the classification of ‘merit’ and ‘standard’ unlike when it was first rolled out in 2017 with levies were finalised based on revenue neutrality, the Central Board of Indirect Taxes and Customs (CBIC) Sanjay Kumar Agarwal said on Thursday.
The taxes were levied at the rate of 5, 12, 18, and 28 per cent, besides a compensation cess on luxury and demerit goods, when GST was introduced on July 1, 2017 after subsuming about a dozen of local levies.
The GST Council on Wednesday decided to prune the slabs to just two, with tax rates at 5 and 18 per cent, and a special 40 per cent rate on demerit and luxury items.
The main consideration for deciding tax rate on any item was revenue neutrality based on the then prevailing excise or VAT rate in 2017. Going by that theory, cement was placed in a 28 per cent slab, he explained.
However, in the current rationalisation exercise, goods and services were categorised as ‘merit and standard’ and taxes were lowered on them without going into the revenue consideration.
The tax rates will be effective on September 22, except for tobacco and related items.
Asked about industry worry on accumulation of input tax credit (ITC) on inventories, on which tax rates have been cut, the CBIC chief said the industry can pay GST dues using their entire ITC claims even after the new tax rates are rolled out from September 22.
“When they sell the goods or make the supplies, from September 22 onwards, new rates will apply. They (dealers) can utilise the ITC for making the duty payment while filing returns,” Agarwal noted.
He said the ITC accumulation will be there for a very short period, and as industry uses it to pay taxes, the system will become smooth again.
Under the GST law, businesses can pay up to 99 per cent of their tax liability using ITC, and the remaining liability can be paid in cash.
Agarwal said that as businesses pay taxes using ITC, there might be some dip in monthly collection.
“Whenever a rate rationalisation exercise happens during the transition period, there will be some dip in revenue collections, but our experience is that increased consumption will lead to higher GST collections. Rate rationalisation leads to more economic activity, an increase in GDP and overall better collections,” Agarwal said.