GST Rate Rationalisation: Impact on different industries and challenges in tax simplification

The primary goal of rate rationalisation is not to increase government revenue but to streamline tax rates across sectors.

By Smita Singh, Prateek Sagar, and Anuj Jhanwar 

The issue of GST rate rationalisation has been consistently addressed with the GST Council over the last six years. Various steps have been taken and issues discussed to streamline the process. It is well-known that the Fitment Committee has been working on rate rationalisation for various goods and services, including reviewing the option of a three-slab structure. Despite the complexities arising from multiple tax rate slabs, the measures undertaken aim to simplify the previously complex tax structure. The primary goal of rate rationalisation is not to increase government revenue but to streamline tax rates across sectors, thereby reducing the cascading effect of taxes and litigation related to tax classifications.

Impact on Manufacturing and Compliance

The manufacturing industry is broaching the subject of GST rationalisation with much fervour. The aim of the GST rate structure is to make tax systems simpler while at the same time keeping revenues neutral, which is not an easy task. In order to resolve classification challenges and relieve manufacturing sector from compliance strains, experts have proposed combining the 12% and 18% slabs and overhaul of the existing four-tiered GST rate structure of 5%, 12%, 18% and 28%. The present inverted duty structure where input rates exceed output rates has resulted to blockage of cash flow for various industries such as textile, solar, edible oils, etc. This will also address the issue of classification for availing a beneficial rate.

In the past, Government has exempted GST on sanitary napkins as a rate rationalisation measure. As a result, the manufactures were denied the benefit of ITC which compelled the manufacturers to add the cost of ITC denied on raw materials to the price of final product, thereby increasing the market price of sanitary napkin. The overall impact of GST rate rationalisation on sanitary napkin remained ineffective.

Challenges Faced by Different Sectors

The insurance sector attracts a GST rate of 18% presently, the industry has been demanding reduction in tax rates, especially for health insurance services. Further, restaurant services attract GST @ 5% without any benefit of claiming Input Tax Credit (ITC). However, the restaurant sector has been demanding an optional structure for themselves that allow ITC with tax @12% on restaurant services.

The real estate sector has encountered mixed effects from GST rate rationalisation. In the past, GST structure for construction services and related activities amended comprehensively. For residential properties, the rationalisation has resulted in lower GST rates, however, since ITC cannot be availed by this sector, the overall cost of housing becomes costlier. Further, cement which is a major component of the real estate sector is taxable at the highest rate of 28%, even in case of affordable schemes as well. Hence, the sector requires relief in this aspect.

The tourism and hospitality sector seeks GST rate rationalisation to make the sector more affordable. GST rates on luxury hotels and high-end travel services is high as compared to other categories, which affect consumer demand in these segments.

In pharmaceutical sector, various inputs used in preparing medications attract 18%, while the final product is in 5% tax slab. Similarly, electric vehicles is taxed at the rate of 5%, while its input involves range in the slab of 18-28%. Hence, GST Council may re-look at the GST rates where inverted duty scenarios arise.

Separately, introducing ATF and natural gas within the ambit of GST, which is presently not leviable to GST, is also under pipeline. Presently, ITC of GST is not available and is added in the cost incurred by oil and gas companies.

Balancing Sector-Specific Needs

GST rate rationalisation has had a profound impact on various sectors, each adjusting to the new tax landscape in different ways. While many sectors benefit from the simplified tax structure and reduced rates, others face challenges related to compliance and transitional issues. Overall, the goal of GST rationalisation is to create a more transparent, efficient, and equitable tax environment, fostering economic growth and improving the business climate across India.

(The authors Smita Singh is a Partner; Prateek Sagar a Senior Associate and Anuj Jhanwar an Associate at S&A Law Offices.)

Views are personal, and do not represent the stand of this publication.