The proposed changes, including adjustments to tax slabs for premium and essential goods, aim to balance revenue growth with fair taxation. Experts Pratik Jain, Partner, PwC India and Abhishek Jain, Partner & National Head -Indirect Tax, KPMG India believe that while these measures could be revenue-neutral, they might add complexity to the GST system.
Here are the edited excerpts:
Q: Could you explain the proposed 35% tax on tobacco? Will it be in addition to the existing cess? And if so, do you expect any adjustments to the cess rates?
Pratik Jain: Yes, as it stands, there are four GST slabs in India: 5%, 12%, 18%, and 28%. A Group of Ministers (GoM) was set up in 2021 to simplify the tax structure, merge tax slabs, and explore ways to augment revenue. As of now, the proposal is that the 28% rate on tobacco and aerated beverages is proposed to go up to 35%. That would mean that it would continue along with a cess, which continues as it is.
The cess is going to end in March 2026; you can collect the cess till March 2026. It will be interesting to see whether they reduce the cess over a period of time to make the effective rate the same as you have today. But as of now, the proposal seems to be in addition to cess, and cess is not getting subsumed in any manner. So 28% then becomes effectively 35% if this proposal is accepted.
Q: So, it would continue with the compensation cess. If the 35% slab is introduced, it will be 35% plus the compensation cess? In that context, we’ve seen discussions about a consumption slowdown, especially among lower-income groups. If certain essential categories see a rate reduction, how significant could the revenue loss be for the exchequer? And if higher rates are introduced, particularly for premium products, could it affect GST collections going forward?
Abhishek Jain: According to media reports, the government may raise GST rates on premium products. For example, textiles priced between ₹1,500 and ₹10,000 could see an increase from 12% to 18%, and garments priced above ₹10,000 may attract a 28% rate, up from the current 12%. Similar reports suggest increases in GST for other luxury goods like shoes, watches, etc.
It seems the government might increase GST rates on premium products while reducing rates for essential goods. If that happens, the overall impact on GST collections may be neutral, as any revenue loss from reducing rates on necessary goods could be offset by the increase in rates on premium products—even if the 28% rate for aerated drinks and tobacco does not go up to 35%.
Q: Do you think this overall exercise will be revenue-neutral?
Abhishek Jain: It’s possible. While the details aren’t fully available yet, it seems to be the case where historically, the government’s multi-tier structure was introduced. Late finance minister Arun Jaitley had said that he didn’t want chappal and luxury cars to be at a single rate of GST. That’s why India always had a multi-rate GST rate structure.
More and more, it seems that even for the same goods, like watches and textiles, for lower-value goods, it could be a lower rate and for higher-value goods within the same category, it would attract a higher rate of GST, which the government may intend to make it revenue neutral.
Q: Is this a global practice where a single item with different price ranges has different rates of GST? Is this something because they are trying to do it with watches, shoes and clothes? Is this something that we have seen already?
Pratik Jain: No, not much globally; you have a rate of GST, and that applies to a particular product irrespective of the pricing. So the logic is that if the price is more obvious, you collect more tax because tax is applied to the price.
We have not seen many cases where the GST rate per se is based on the price of the product. To the least one would say that this is not necessarily the best tax policy because it leads to distortions in the chain, leads to pricing challenges and so on. But India, in many cases, is a unique country. We have 1.4-1.5 billion people. We have a lot of people below the poverty line and so on. In that sense, perhaps the government is driven by looking at the common man’s agenda. But if you ask me whether it is something that happens across the globe, the answer is no.
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