GST: Services too would have differential rates
Zero rate for essential services, education, health in lower bracket
There would be differential tax rates for services as well in the goods and services tax (GST) regime, which is proposed to be rolled out from July 1 this year. While the essential services could be zero-rated, basic infrastructure services such as mobile telephony would be taxed moderately. Luxury services would attract higher rate. Speaking to FC, a state finance minister confirmed that multiple tax rates for services would be considered and education and health services will be kept in the lower bracket.
“As far as I remember the tax rates for services were not on the agenda of previous GST Council meetings. But certainly there would be more than one rate for services in the GST,” the state finance minister said.
Meanwhile, the government is planning to gradually raise service tax to avoid a sudden shock to consumers after GST is rolled out. In line with this, finance minister Arun Jaitley is expected to raise it by 1-1.5 per cent in the Union budget on February 1. Taxable services attract an effective tax of 15 per cent but as a result of abatement, certain services like air service have lower tax incidence.
In its meeting on November 3 last year, the GST Council agreed to a four-tier structure of 5, 12, 18 and 28 per cent in the new tax regime with lower rates for essential items and highest band for luxury and ‘sin’ items like tobacco and aerated drinks.
The Council has also agreed to the Centre levying a cess over and above the highest rate.
With most goods (70 per cent) falling under 5, 12 and 18 per cent bracket, services are also expected to be taxed at these rates. The industry expects that most services would be taxed at 12 and 18 per cent in the new regime.
At present, certain services are being abated and have a net rate of much less than 15 per cent. They are being taxed at the rates of 4.5, 6 and 9 per cent, but effective rates for customers are higher because a lot of credits are not available. In many cases, credit cannot be claimed and as a result abatements have been prescribed. These services are expected to be kept in the bracket of 12 per cent in the new regime.
Tax experts are of the view that there would be a rate of 12 per cent for services where all the credits cannot flow. For example, goods transport service and rental car services where petrol and diesel have taxes that cannot be credited. So, they continue to be a cost in new system also. As there would be abatement for these services they would be taxed at a lower rate.
“Two rates are definitely a given. I am not sure if there would be a third rate,” said Bipin Sapra, partner (indirect tax), EY India.
He added that services like health and education could be taxed at a lower rate or may even be zero-rated.
“There should be a differentiation between certain essential services like health and education. Then there are basic infrastructure services like telecom that could be at lower rate. But more importantly, where there are taxes inherently in-built which cannot be credited should attract lower rates,” Sapra added.
Nirbhay Kumar
Subhash Narayan