Tea at 5%, chewing tobacco 160% as India clinches GST rates

Rates for more than 500 services and 1,200 goods were fixed for GST, which will subsume more than a dozen federal and provincial levies

19:00 May 19, 2017

NEW DELHI/TORONTO: Tea will be taxed at 5 per cent and chewing tobacco will face a 160 per cent levy after India finalised most rates for a new goods and services tax, clearing the way for the biggest shake-up in the nation’s tax system since independence in 1947.

Rates for more than 500 services and 1,200 goods were fixed, or 80 per cent to 90 per cent of items were slotted into the GST’s five broad rates in meetings Friday and Thursday between the government and state ministers as the country races to meet the July 1 implementation deadline.

“It’s the last lap now of the GST roll out,” Manjoy Bahety, a vice president at Mumbai-based Edelweiss Securities Ltd. said in a note. “The council’s decisions suggest a July 1 roll-out is almost a certainty now.”

The tax is the culmination of a 10-year effort to streamline India’s archaic tax system and unify the nation of 1.3 billion people into a common market. A major policy goal for Prime Minister Narendra Modi, the GST will subsume more than a dozen federal and provincial levies in a bid to free up trade, make it easier to business and foster tax compliance in the world’s fastest-growing major economy.

The “overall impact is not inflationary,” Finance Minister Arun Jaitley told reporters late Thursday after meetings in Srinagar, a city in the northern state of Jammu and Kashmir. “The tax burden hasn’t increased in any commodity. In many there is a reduction, particularly as tax on tax is gone. On some we have deliberately brought tax down.”

Much of the work on the GST had already been completed including the five broad “slabs” or tax rates. These include a rate of zero for essential items such as grains, 5 per cent for mass consumption items like coffee and commonly used products such as processed foods at 12 per cent. Rates for household goods like soaps were pencilled in at 18 per cent and durables such as LED TVs at 28 per cent.

Chocolate, cement

The government announced a detailed list Thursday which included a tax rate of 5 per cent for tea, 12 per cent for live horses and 28 per cent for razor blades. Key categories where rates will be higher than the current rate are two-wheelers, small cars, cement, fruit juices and chocolates, according to Mumbai-based brokerage Kotak Institutional Equities.

Luxury items will face a levy beyond the 28 per cent top rate, including 160 per cent levy for chewing tobacco, 12 per cent for soft drinks and 72 per cent for hookah products. GST rates for certain goods like textile, footwear and precious metals are yet to be decided by the GST Council.

On Friday it said railway and air transport services would attract a 5 per cent rate, luxury hotels would take the highest rate, while health care and education would continue to be exempt. The rest of the service sector would fall into the various categories.

Clear here to read how doing business will change under India’s GST

Nearly 81 per cent of the items will fall below the 18 per cent rate, Revenue Secretary Hasmukh Adhia said.

Rates for the final products such as gold and other details will be decided at the next meeting of the GST Council on June 3 in Delhi, Jaitley said.

Stocks Rally

India’s S&P BSE Sensex equity index touched a record high before closing up 0.1 per cent on Friday, spurred by consumer companies and utilities which will benefit from the GST rates. The Nifty Fast Moving Consumer Goods Index closed up 2.1 per cent as the tax is poised to lower rates on some products such as soaps.

Colgate-Palmolive India Ltd. rose 3.5 per cent after the rate on toothpaste was set at 18 per cent compared with a 22 per cent to 26 per cent levy seen earlier. ITC Ltd., which gets about 25 per cent of revenue from consumer products other than cigarettes, gained 3 per cent.

Another big winner were power utility companies with CESC Ltd., Adani Power Ltd. and Torrent Power Co. all gaining as coal fell into the 5 per cent category down from about 12 per cent currently.

“The GST rates are positive for markets as it puts to rest the uncertainty regarding rates,” Abhimanyu Sofat, vice president at brokerage India Infoline Ltd. in Mumbai, said by phone. “Also, lots of money is sitting on the sidelines waiting to be invested into the Indian markets. The rates are positive for the power-sector consumers due to the lower coal prices.”

More Compliance

Girish Pai, head of research at Nirmal Bang Equities, said too many items have been placed into the topmost 28 per cent bracket to make it neutral as the government promised. The rate on cement for example will rise to 28 per cent from 24 per cent to 25 per cent and the difference will likely be passed onto consumers, he said in a note.

Government revenue will rise as more people and businesses pay up, said Dinesh Kanabar, the Mumbai-based CEO of Dhruva Advisors LLP and former deputy CEO of KPMG India. “If the rates are reasonable and moderate and not very high, it will encourage voluntary compliance, and a large part of the unregulated economy will come into the tax net.”

India is joining about 160 countries that have a GST, including Poland, Canada and Japan. The US has always resisted a national sales tax. The new levy will apply at the final point of consumption, reducing the cascading effect of taxes on tax, allowing producers to easily claim credits and minimising the opportunity for corruption.

State Agreement

The federal government has already agreed on compensation to states if revenue is lost due to the implementation of the GST. As of May 4, eight states including Rajasthan, Telangana, Bihar, Madhya Pradesh, Haryana and Jharkhand had passed a state goods and services tax act in their state assemblies. The remaining states were likely to pass the state GST bill “before the end of this month,” except for one or two, according to a federal government statement.

Getting India’s 29 state leaders to agree to the GST has not been easy for Modi and his Bharatiya Janata Party, some of whom contest the party in provincial legislatures and elections across the country.

“In terms of sheer politics, the government has, if I may, handled it exceptionally well,” Dhruva’s Kanabar said. “Because the states are coming on board, even in states where the BJP is not around.”

— Bloomberg