The Hindu Explains: From GST rate cuts to the confusing science behind formaldehyde

What is the GST rate cut all about?

What is it?

The Goods and Services Tax (GST) Council, at its 28th meeting, reduced the tax rates on more than 50 items, including commonly used products like sanitary pads, and white goods like washing machines, refrigerators and kitchen appliances. Sanitary pads have been exempt from the GST — it had a 12% tax rate earlier. White goods have seen their tax rates reduced to 18% from the earlier 28%.

Also of interest to the common man, the Council decided to tax footwear of value up to ₹1,000 at 5%, where earlier this slab was reserved for footwear up to a value of ₹500.

The Council also decided to provide relief to the hotel industry by saying that the rate of tax on the accommodation service would be calculated on the basis of the transaction value and not the declared tariff.

The Council took a key decision on the returns filing process. Assessees with an annual income of less than ₹5 crore can now file their returns on a quarterly basis. This affects more than 90% of GST filers, and so has been seen as a welcome move for small businesses. In addition, the Council finalised two simplified forms — Sahaj and Sugam — for the large filers.

How did it come about?

The rate reductions are in keeping with the Council’s ongoing efforts to rationalise the tax rates and keep as few items in the 28% bracket as possible. The simplification of the return filing procedures is also the next in a series of steps taken by the Council such as widening the eligibility criterion of the Composition Scheme, putting on hold the more complicated aspects of filing GST returns, and simplifying the forms in a staged manner.

Why does it matter?

The decision to exempt sanitary pads from the GST has been seen as a women-friendly and progressive move that will greatly reduce their price. This is an incorrect assessment, given how the GST is structured. Products exempt from the GST are also ineligible for input tax credits. So, while the output tax has been slashed, the input tax burden on companies making these pads has increased.

With the two main manufacturers of pads in India likely wanting to maintain their profit margins at the same levels as before the rate cut was announced, the decrease in price for the consumers is likely to only be a few rupees.

Further, the government deflected questions on the revenue impact of its rate reductions on white goods by saying that the increased demand due to the price reduction would mean that the overall tax revenue from these products would remain largely unaffected. First, the tax relief will result in only a 7-8% price reduction of these white goods, many of which cost several thousand rupees. Second, the demand for these white goods is relatively inelastic in the sense that people will not buy more of them simply because they are cheaper. You will buy only as many washing machines as you need.

That aside, what the rate cuts have done is to narrow the 28% rate slab to only luxury items and sin goods such as tobacco and cigarettes. This is a welcome move, and a big step towards possibly removing the slab altogether, thereby further simplifying the GST.

What next?

The GST Council takes up new rate-related issues at each of its meetings. Looming over the agenda is the issue of petroleum products and when they will be included in the GST. Reports say the Council will take this up in a staged manner, first considering natural gas, then aviation turbine fuel, and then possibly petrol and diesel.

The return filing process is also in for some more gradual changes as the Council finalises the manner in which the invoice-matching system can be incorporated into the system. Without invoice matching, the GST is still incomplete.

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Printable version | Feb 18, 2020 6:58:45 PM |

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