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India should have three broad tax slabs of zero, 5 percent and a standard rate, which will replace 12 and 18 percent Goods and Services Tax (GST) rate, finance minister Arun Jaitley said today.
As an exception, luxury goods such as big cars and demerit goods such aerated drinks and tobacco products, could be taxed at a higher rate.
“A future roadmap could well be to work towards a single standard rate instead of two standard rates of 12 percent and 18 percent. It could be a rate at some mid-point between the two,” Jaitley said in a blog post.
Currently, 1,216 goods and services fall into four broad tax slabs- 5, 12, 18 and 28 percent. Broadly, 183 items are taxed at zero rate, 308 at 5 percent, 178 at 12 percent and 517 at 18 percent and 27 items at the highest tax bracket.
The 28 percent slab is now a dying slab, Jaitley said, adding that the overhaul of tax slabs will take ‘reasonable time’ when tax collections ‘rise significantly’.
Jaitley’s comments come soon after the GST Council on Saturday slashed rates on 17 goods and six services, such as televisions, movie tickets, video games, among others, restricting only 27 items in the highest tax slab of 28 percent. New rates will be applicable from January 1, 2019.
“Our next priority will be to transfer cement into a lower slab. All other building materials have already been transferred from 28 to 18 and 12 percent. The sun is setting on the 28 percent slab,” he said.
Apart from reducing rates, the Council also rationalized and made clarifications related to certain goods, a move that is expected to boost consumption. Essentially, the 28 percent slab will mainly consist of demerit goods such as aerated drinks, tobacco products and automobile and auto parts, along with other items such as cement, air-conditioners, molasses and dishwashers.
In the last one and half years, the Council has significantly pruned the list of 226 items placed in the highest tax slab of 28 percent.
The revenue impact of the rate rationalisation exercise will be Rs 5,500 crore annually and Rs 1,375 crore for the remaining three months of the financial year 2018-19.
It is also learnt that some states had opposed rate cut in the last Council meeting as they wanted move’s impact on revenues to be fleshed out in greater detail before levies are lowered.
Taking a jibe at Congress, Jaitley said ‘those who oppressed India with a 31 percent indirect tax and consistently belittled the GST must seriously introspect. Irresponsible politics and irresponsible economics is only a race to the bottom’.
He further said that new indirect tax regime has helped in controlling inflation as well as tax evasion, which was rampant in the pre-GST regime, where there was a cascading effect of tax on tax.
“The rate of taxation were exorbitantly high. The standard rate of VAT and excise was 14.5 and 12.5 percent respectively. To this could be added the CST and the cascading effect of tax on tax. The standard rate thus became 31% on a large number of commodities. The assessees had only two options – either to pay a high rate of tax or evade it,” he said.