It is clear that the new indirect tax regime GST will affect almost all the goods and services in the market. But we have to wait a little bit more to find out how much that impact will be

Last week, the goods and services tax (GST) council, in which the states and the central government participated, announced the GST rate structure. The rates are in four slabs: 5%, 12%, 18% and 28%. The luxury and sin goods, will be taxed above 28% plus additional cess. And essential goods like foodgrains will be in the 0% slab, if we can call it a slab.

This is a major step towards meeting the April 2017 deadline for implementing GST, but by itself this announcement means very little. The GST council will meet a few more times in November, and then more laws will have to be passed in the winter session of Parliament. Post that, state legislatures will have to pass their own laws, and only then will there will be a workable framework for implementing the GST nationwide.

For now, we know the GST rates. What we do not know—among many other things—is the rate at which specific items will be taxed, in different parts of the country. If you want to know how much more or less you will have to pay to buy a house, a car, some mutual funds or that annual holiday next year, you will have to wait a bit more. But there are some broad indications out there and Mint Money looks at how the implication of GST will affect you.

Banking and insurance

All financial products will be impacted by the GST. Banking products are already in the service tax net. Banks typically pass this tax burden to their customers in the form of charges and fees. The same is likely to happen with the GST.

The current service tax rate is 15%, and with GST, banking and insurance services are likely to be in the 18% slab. “Also, if the free banking services get taxed, again it will impact the customers. Right now, there is no clarity if the government is looking to tax interest also,” said Nihal Kothari, executive director, Khaitan and Co., a Mumbai-based law firm. We have to wait for the final rates. “The Rajya Sabha had pointed out that banking services should have lower rates. We will have more clarity on it by mid-November. You will see the maximum impact on financial services,” said Kothari.

The insurance industry is proposing that at least the life insurance services should be taxed at a lower rate of 10-12%, and more importantly, the GST rate for it should be uniform across the states. “Though our proposal is 10-12%, I think government will be more likely to keep it at 18%,” said Prashant Tripathy, senior director and chief financial officer, Max Life Insurance.

The demand for lower rates is easily understandable. But why does the industry want a single rate across states?

Insurance and banking companies are large organisations, with offices all over the country. For reasons of efficiency and economy of scale, many of these offices perform specialised functions for an entire region, or even the whole country. For instance, a customer may pay for a life insurance policy in a Mumbai branch, have her know-your-customer (KYC) process done by an office in Delhi, her policy prepared by a branch in Gurgaon, and have it mailed from a centralised dispatch office in Chennai. The company’s centralised data warehouse may be in Hyderabad and the call centre in Kolkata. Taxing these services currently is not a problem, as the service tax is at a uniform rate of 15% across the country. “Though the impact is yet to be fleshed out, there will be administrative issues for the insurance sector. Taxation is determined by where the business originates. We assume it could be state-wise, which will become more complex for insurance,” said Sanjay Datta, chief-underwriting and claims, ICICI Lombard General Insurance Co. Ltd.

Banking and insurance industries are, therefore, seeking a centralised registration system instead of having to register different offices in different states separately.

Non-financial products

The stated aim of the GST was to have a single indirect tax regime across the country, however, the current structure “is against the very essence of a simplified tax regime, even as it scores high on progressivity and inflation neutrality,” said Jay Shankar, chief India economist, Religare Institutional Research.

Analysts believe that the effective tax rate under GST will keep the prices for consumers at the same level as at present. For instance: aerated drinks are taxed at 40% and luxury cars at 40-45%. In both the cases, similar rates are being proposed to be retained in the form of 28% tax plus cess.

The current tax incidence on cars is around 26% and under GST they would be in the 28% tax slab, which is in line with the current tax incidence, said Sachin Menon, partner and head, indirect tax at KPMG in India. The auto sector was expecting cars to be taxed at 18% under the GST regime.

“The broad principle…seems to be that goods (will not) attract more tax than they are currently attracting. So, the goods or services will be categorised in the nearest lower slab,” Menon said. “For most goods, there will be a reduction in total tax,” he said. Taxes, and hence prices, may not go up. White goods present a tricky situation. While washing machines, refrigerators and televisions can be called luxury goods, it may not be proper to call them sin goods. “(The government) should take care that these do not come under the 28% slab. It is not yet clear what tax bracket these will fall under. Most probably it should fall under 18%,” Menon said.

More clarity is needed on telecom services too. Many believe that the common man could in fact end up gaining to some extent. The current level of taxes on services is 15% and it can go up to 18%. But “if you look at the service basket, the only item that is used by every common person is a mobile phone. The government will not bring a rate that will pinch the common man,” Menon said, adding that telecommunication and transportation services could fall under 5% or 12% tax slabs. The excitement around GST will give way to more informed discussions once the different goods and services are allocated to the GST slabs. “Without these specifics, it is not possible to assess the exact impact on the final prices of individual goods and services,” Shankar said.

Final rates for goods and services could take some time, but we can expect more clarity by end of November, when the GST council would have met a few more times. But we can already expect that GST will have only a small impact on the price of your banking and insurance products. And while the tax impact on most goods would remain the same, it could come down for some.