India Panel Agrees on Rates, Sets Stage for Landmark Tax

  • Standard rate comprising most items fixed at 12% and 18%
  • Tobacco taxed at 65%, luxury goods to attract higher rate

A panel comprising Finance Minister Arun Jaitley and his state peers agreed on key rates for a national sales tax, setting the stage for the roll out of one of India’s biggest economic reforms in decades.

The Goods and Services Tax Council recommended standard rates of 12 percent and 18 percent, at which most goods will be taxed, Jaitley said in a briefing in New Delhi on Thursday.

Jaitley said the panel decided two more tax slabs of 5 percent and 28 percent and confirmed food grains would be exempt. Tobacco products will be taxed at 65 percent, he said, adding luxury goods will also be taxed at a higher rate.

The government will need an additional 500 billion rupees to compensate states for loss of revenue once the new tax structure is in place. Officials will decide the details of goods that will be placed in each tax slab, Jaitley said, noting the decision on gold will be deferred until the government assesses the GST’s impact on revenue.

"There will be a zero tax rate in which several items which approximately constitutes 50 percent of CPI basket will be included and it was decided food grains used by common people will be included," Jaitley said at press conference. "It is zero rate because its impact in terms of the inflationary pressure on common people is the least."

India plans to stick to an April 2017 roll out, with GST legislation to be presented to the parliament during the upcoming winter session, revenue secretary Hasmukh Adhia said.

For a QuickTake on how the new tax might help business, click here

"The markets should have no reason to be disappointed," Deven Choskey, managing director at Mumbai-based K.R. Choksey Shares & Securities, said by phone. "More than half the items that influence CPI will be taxed at the lowest rate, that way inflation will stay under control."

Higher tobacco and liquor taxes will not greatly concern the markets, because demand is inelastic and not too sensitive to price, said Aneesh Srivastava, who manages $700 million as chief investment officer at IDBI Federal Life Insurance Co. in Mumbai. "So the companies won’t face much fundamental impact of this, only short term sentimental impact."

The tax will subsume a web of levies, creating a single market of 1.3 billion people, or twice the population of North America. While Prime Minister Narendra Modi has opened India to more foreign investment since taking power in 2014, the nation’s confusing tax regime is often seen as a deterrent. 

India rose just one spot to 130 in the World Bank’s latest Doing Business ranking, far from Modi’s targeted break into the top 50 by 2018. On a newly created "post-filing" indicator -- which measures parameters such how easy it is to get tax refunds -- the only countries worse than India were Somalia, Afghanistan, Timor-Leste and Turkey.

While the levy’s ultimate impact will depend on how smoothly it is rolled out, Jaitley has said it can boost gross domestic product by as much as two percentage points. Policy makers see little or no impact on inflation from an 18 percent standard rate, consistent with a revenue-neutral rate of about 15 percent.

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