May 20, 2017 4:30 am JST

India sets consumer-conscious GST rates

Work nearly finished on country's biggest tax reform in 70 years

KIRAN SHARMA, Nikkei staff writer

NEW DELHI -- India has set rates for most goods and all services ahead of the much-anticipated July 1 launch of a unified sales tax regime that Prime Minister Narendra Modi's government touts as consumer-friendly and not inflationary.

"Most of the work relating to the rollout" of the goods and services tax "has been completed," Finance Minister Arun Jaitley told reporters Friday at the end of a two-day GST Council meeting in Srinagar, capital of the northern Indian state of Jammu and Kashmir.

Only "a few things" remain up in the air, Jaitley said. These cover six categories of goods, including footwear, textiles and precious metals. The council meets next in New Delhi on June 3 to tie up the loose ends. Both goods and services will be taxed at four rates under the GST: 5%, 12%, 18% and 28%. Additional levies will apply for some items in the highest tier, such as luxury cars.

The council set rates for 1,211 items on Thursday, and rates for all services the day after. "Finally, the GST in relation to service sector was completely adopted in today's meeting," Jaitley said.

The new tax is paid only indirectly by the consumer, unlike directly imposed income and wealth taxes. Current taxes to be subsumed into the GST include the central government's excise duty and service tax, as well as state governments' purchase and value-added taxes. Revenue is to be shared equally between New Delhi and states.

This reform is expected to lower prices for consumers, boost domestic manufacturing, make exports more competitive, and generally help business.

Such daily necessities as food grains, fresh meat and vegetables, and certain dairy products will not be taxed. The 5% rate will apply to items for mass consumption, such as tea, coffee and spices. In the 12% category are the likes of frozen meat products, butter and cheese. The 18% tier includes such products as pasta, cornflakes, hair oil, toothpaste, and bar and cake soap. Such items as carbonated beverages and automobiles will be taxed at 28%.

Sunil Kumar Sinha, principal economist at the Fitch group's India Ratings and Research, expects a boost of between 0.9% and 1.7% to gross domestic product "if the GST is implemented properly." GDP is now growing at a roughly 7% clip.

The GST marks the biggest tax reform since India won independence from British rule in 1947. Designed to replace more than a dozen confusing levies imposed by the central and state governments with a uniform national sales tax, it is expected to enable the seamless transfer of goods and services across the economy.

The lower-income demographic should benefit as it pays less for items placed in the lowest tier. Analysts feel that companies involved in fast-moving consumer goods will be at an advantage as taxes on such items as soap and toothpaste fall to 18% from up to 28%. And some items exempted from the GST are currently taxed at rates up to 5%.

Hindustan Unilever said the GST rates are broadly in line with what it expected, except for the 28% on laundry detergent and household care products. This "is in contrast to other daily necessity products such as soaps and toothpaste," a spokesperson said.

Ishmeet Singh, country manager for India at U.S. children's products maker Mattel, said toys and games now qualifying for excise duty exemptions or rebates will be "burdened with an unfair and high taxation" rate of up to 28% under the GST.

On the services front, luxury hotels, five-star restaurants, movie theaters and race clubs will draw the highest 28% rate. Non-air-conditioned restaurants fall into the 12% bracket. Telecommunications and insurance services will draw an 18% tax, and the transportation sector 5%. Hotels and lodging facilities charging less than 1,000 rupees (about $15) are exempted from the GST. Those with rates of 1,000 rupees to 2,500 rupees will be taxed at 12%, while those charging 2,500 rupees to 5,000 rupees will draw an 18% tax. Luxury hotels fall into the 28% category.

Ritesh Agarwal, founder and CEO of budget hotel marketplace Oyo Rooms, said the lower tax rate for the segment where his company operates will "save and create thousands of new jobs" and boost revenue from the travel and tourism sector.

Most of the services have been grandfathered in, and those exemptions will remain in place, Jaitley said, referring to the education and health care sectors. "The net effect of goods and services is not going to be inflationary," he said.

The government has also maintained that the GST will be revenue-neutral.

GST rates for major sectors are mostly in line with present effective tax incidences, according to Crisil Research. Consumer durables, construction materials and fast-moving consumer goods will see only a "marginal difference," the S&P Global group company said. But tax savings will be relatively higher in the automobile sector -- specifically, sport utility vehicles, whose current effective tax rate will drop from over 50% to a 43% consisting of a 28% GST plus an extra 15% levy.

This certainty about the GST's implementation will be "credit-positive" for India, said N.R. Bhanumurthy, an economics professor at the National Institute of Public Finance and Policy.

"The rating agencies should give more weightage to this tax reform," which in turn "should attract more foreign capital," he said.

But Bhanumurthy said it will take some time for India to get accustomed to the GST. "There would be some teething issues in the beginning," he said. "It should take a couple of years to really feel comfortable with the new tax regime."

Liquor taxes are not part of the GST, and states will retain the authority to tax alcoholic beverages. And under the current setup, the GST also does not apply to crude oil, natural gas, gasoline, diesel fuel and jet fuel.

The new system has been in the works since 2006. But the previous government, under the United Progressive Alliance coalition, could not forge a consensus among states, especially on the issue of manufacturing regions losing revenue. As a destination-based tax, the GST will benefit states that consume goods and services rather than those that export them.

Modi's Bharatiya Janata Party-led National Democratic Alliance government, which came to power in May 2014, promised compensation to states losing revenue to the GST, helping it bring all states on board.

Nikkei staff writer Rosemary Marandi in Mumbai contributed to this story.

Asia300

Hindustan Unilever Ltd.

India

Market(Ticker): BOM(500696)
Sector:
Industry:
Consumer Non-Durables
Household/Personal Care
Market cap(USD): 40,278.10M
Shares: 2,164.46M

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