Goods and Services Tax (GST) was introduced in 2014 and came into effect in 2017. It subsumed various central indirect taxes including central excise duty, countervailing duty, service tax, state VAT, octroi, luxury tax, etc.
GST Council conducted its 47th meeting in June 2022 at Chandigarh. The council discussed recommendations on rate rationalisation, system reforms, movement of gold and precious stones and casinos, horse racing, and online gaming. The changed rates were implemented from July 18, 2022. GST exemption was removed from pre-packaged and labelled items including food items. However, unpacked food items continue to be exempted. There was a rate hike in household items like LED lamps, ink, and tetra packs from 12 per cent to 18 per cent, cut and polished diamonds were hiked from 0.25 per cent to 1.5 per cent. Finished leather and solar water heaters were increased from 5 per cent to 12 per cent. Packaged food items like grains, curd, jaggery, buttermilk, meat, etc, which were exempted before, will now be charged at 5 per cent. Goods that are unpacked and unlabelled will remain exempt from GST. 5 per cent GST will be levied on hospital room rent that is above Rs.5,000 per day excluding ICU.
Reason Behind Introducing Changes
The Council expects to yield Rs.15,000 crore in revenue in a year with the increased rates through these rate changes. This revision was done to restore revenue neutrality. The rates were also revised to bring parity in prices of goods that do not vary much in quality. GST Council took these measures to correct the inverted duty structure. An inverted duty structure occurs when the taxes on final goods and services are less than the taxes on inputs. This results in an inverse build up of input tax credit which has to be refunded in most cases. For instance, in case of sectors such as mobile and footwear, inverted duty structure led to refunds of Rs 5,500 and 2,000 crore, respectively. However, inverted duty structure for these two sectors were corrected in 2020 (mobile) and 2021 (footwears). The difference in rates for about 500 items in the GST regime has reduced the revenue by about 70,000 crores which affected both central and state governments.
Rate rationalisation was also required in view of the fact that guaranteed compensation mechanism to states for five years for revenue losses caused to them on account of GST implementation ended in June 2022 and it was not extended.
Withdrawal of exemptions of pre-packaged items was required to address concerns related to revenue leakage as some compares were misusing the provision of exemption by not registering them.
Impact of GST rate change
Hikes in rates for daily-use consumer goods like LED lamps, and packaged food items will result in a price hike. With the already existing global situation of inflation, this rate hike could add to the existing inflation. A hike in the GST on pay for hotels is likely to affect tourism in non-metro cities as they become expensive. But, the Consumer Price Index may not be affected to a large extent by the rate hike. This is because most of these items which have a rate hike do not have significant weightage in the CPI as compared to petrol or diesel. Hotels have a weight of 0.00904 in CPI, while the increase in LED bulbs rate could increase CPI by 0.11 basis points, and curd may impact about 0.47 basis points (Indian Express). So, these changes are not likely to affect the CPI sharply. But this does not mean that the consumers will not be impacted at all, the rate hike does affect the final prices of all the goods and it will impact the consumers by increasing the expenditure as well as the cost of living.
The high rate of GST on tetra packs and also a ban on single-use plastics would impact the packaging industry. But one of the positive aspect of the increased rates on packaged items is that the levy of GST on packed items and exemption of GST on unpacked items could encourage small and retail traders. This negatively affects huge retail brands and positively affects small traders.
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