In its recent meeting in New Delhi, the group of ministers (GoM) on GST rate rationalisation has recommended tax slabs based on the pricing of products, with more expensive goods and services of the same sort attracting higher tax rates.
This is not completely new for the GST regime - there are already product categories where the rates are based on maximum retail prices. But the latest recommendations seem to be a major shift towards a price-based tax structure.
If the recommendations are accepted by the GST Council, which sets the rates, the new system would be complex and cumbersome in terms of compliance. At the same time, it would give some respite to people with lower incomes. It might look like a populist move but will address the anger of a large section of the people who feel unduly overtaxed.
If seen closely, the GoM’s recommendations try to keep the goods and services used by a larger section of the people in the middle- or lower-income categories in lower tax brackets.
For example, the panel has recommended lowering the rate on 20-litre drinking water containers, bicycles and notebooks from the current 18 per cent to 5 per cent.
The GST on bicycles costing less than Rs 10,000 is recommended to be lowered from 12 percent to 5 percent. However, some items in the 18 percent category - such as hair dryers, curlers and some make-up kits - could be back in the 28 percent bracket, the highest.
Similarly, shoes and watches above Rs 15,000 would attract 28 per cent. The GoM has made similarly graded recommendations on health insurance - no tax on premiums for policies insuring sums up to Rs 5 lakh, but 18 percent for those insuring higher amounts.
Going by the recommendations, it is quite clear that the policy-makers are not looking for a simplified GST structure. A pricing-based rate structure would only lead to more complications and compliance headaches.
There would be further sub-categorisation within similar product and service categories, and hence the need to use more HSN or harmonised system of nomenclature codes. This could lead to more litigation in future. However, if accepted, the recommendations would give some respite to the common man.