Centre, states taxmen to decide services rate in GST this week

New Delhi: Tax officials of the central and state governments will this week hold their maiden meeting on devising a formula for tax rate to be levied on services under the Goods and Services Tax (GST) regime from July 1.

While the GST Council had previously decided on a four- tier rate structure of 5, 12, 18 and 28 per cent, its fitment committee will hold its first meeting this week on slotting different services in one of the slabs, a senior official told PTI.

The task before the panel is to keep the impact of GST on inflation and prices near neutral or zero. The fitment committee is likely to hold more meetings before GST Council's meeting on May 18-19 where tax rates for different products and services are to be finalised so as to enable roll out of the biggest tax reform from July 1.

"The fitment committee will start with deciding on tax rates on services. Since the Centre alone has the power to levy service tax under the current regime, fixing of the tax rate on services would be an easier task," the official said.

The official said that most of the services where both VAT and service tax were levied would be fit around the standard rate of 18 per cent, while those on which only 12.5 per cent VAT was levied would be brought to 12 per cent.

Also services provided by transportation and logistics players would be fitted in 12 per cent bracket, while services in 9 per cent bracket could be fitted in 12 per cent, the official said.

Tax rate which is closest to the present incidence of tax on a good or service will be chosen with a view to keeping the shift from the present regime of excise duty plus VAT or service tax to a new uniform GST neutral for consumers.

The official said tax rates will be decided in a fashion to keep their impact on inflation as well as revenues to the government near neutral. Once tax rates on services are decided, the fitment committee will meet again after a fortnight or so to decide on tax rates on goods before a full report of the panel is put up for consideration before the GST Council in its May 18-19 meeting in Srinagar.

The GST Council, headed by Union Finance Minister and comprising state representatives as members, would kick start the discussion on rates in the May meeting and the final fitment would be done by June.

Under the current regime, the Centre has the power to levy tax on production of goods (except liquor for human consumption, opium, narcotics) while the states have the power to levy tax on sale of goods.

In the case of inter-state sales, the Centre has the power to levy a tax (the Central Sales Tax) but, the tax is collected and retained entirely by the originating states. Revenue Secretary Hasmukh Adhia had earlier said that the Centre will make a strong case to the GST Council for not touching services that are out of tax net currently, it will also pitch for keeping concessional rate for services like transport at the current level.

Currently, there are 17 items in negative list of services on which tax is not levied. On top of that there are over 60 services, like religious pilgrimage, healthcare, education, skill development, journalistic activities which are exempt from service tax.

The official further said that once goods and services are fitted in tax brackets, the fitment committee will work out the inflation impact. While fitting an item, effort will be made to keep it at the closest possible bracket in which it is at present to keep impact on inflation at minimal.

"While it is given that there will be some impact on inflation to begin with but in 6-8 months as companies analyse the GST impact on sales and start passing on the benefits of tax rate reduction to consumers, inflation would come down," the official added. Nangia & Co Director (Indirect Taxation) Rajat Mohan said currently taxes on services are levied by the central government at a general rate of 15 per cent.

"We expect going forward this rate of tax would increase to 18 per cent. This will give rise to a marginal increase in budgets vis-a-vis your phone bills, internet bills, professional services, consultant services, rent on commercial buildings, the supply of manpower, cosmetic surgery, interior decorator services, security agency services, etc," he said.

Also there are some service sectors which are taxed at a rate lower than 15 per cent like transportation of goods or passenger by Indian railway at 4.5 per cent, service by way of supply of food in restaurants, hotel (10.5 per cent), transportation of goods by transportation agency or radio taxi at (4.5-6 per cent), tour operator services (9 per cent), construction of complex (4.5 per cent), economic class air- fare (6 per cent), business class air-fare (9 per cent). Such services should be put in tax brackets of 5 per cent or 12 per cent and not in the bracket of 18 per cent.

"The government would like to restrict the inflationary impact of GST which could be done only by ring-fencing all such services in the tax bracket close to the current rate of taxes," Mohan added.

He said countries like Canada, Australia and New Zealand and Malaysia, witnessed a one-time increase in inflation for a very short period after GST implementation, that was normalised eventually.