A four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and de-merits goods that would also attract an additional cess, was decided by the all-powerful GST Council on Thursday.

Announcing the decisions arrived at the first day of the two-day GST Council meeting, Finance Minister Arun Jaitley said highest tax slab will be applicable to items which are currently taxed at 30-31% (excise duty plus VAT).

b’A file photo of Arun Jaitley | Source: PTI’

Here is what it would mean:

  • With a view to keeping inflation under check, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate.
  • The lowest rate of 5% would be for common use items while there would be two standard rates of 12% and 18% under the Goods and Services Tax (GST) regime targeted to be rolled out from April 1, 2017.
  • Luxury cars, tobacco and aerated drinks would also be levied with an additional cess on top of the highest tax rate.
  • The collection from this cess as well as that of the clean energy cess would create a revenue pool which would be used for compensating states for any loss of revenue during the first five years of implementation of GST.
  • The structure to agreed is a compromise to accommodate demand for the highest tax rate of 40% by states like Kerala.
b’A file photo ofxc2xa0Arun Jaitley (right) with Chief Economic Advisor Arvind Subramanian | Source: PTI’
  • The long-delayed tax, which would transform Asia’s third largest economy into a single market, is expected to boost revenues through better compliance while making life simpler for business that now pay a host of federal and state levies.
  • Rs 50,000 crore would be needed to compensate states for loss of revenue from rollout of GST, which is to subsume a host of central and state taxes like excise duty, service tax and VAT, in the first year.
  • Finance Minister Arun Jaitley will seek parliamentary approval for bills later this month that would set the rate and scope of the GST. State assemblies must also approve similar bills for the tax to enter force as planned next April 1.