How is inflation going to come down after the 4-tier GST structure ?

A four-tier GST tax structure of 5, 12, 18 and 28 percent that aims to lower tax incidence on most goods and keep out essential items was decided on by a high-powered council today - a major breakthrough for the implementation of the Goods and Services Tax regime from April 1 next year.

Luxury items like high-end cars and demerit goods, including tobacco, pan masala and aerated drinks, will be taxed at the highest rate and will also attract a cess in such a way that the total incidence of tax remains at almost the current level. With a view to safeguarding the interest of the poor and keeping inflation under check, half the items in the CPI basket, like food grains, will not be taxed at all, while there will be two standard tax rates of 12 and 18 percent for the rest.

The lowest rate of five percent would be for common use items under the GST regime. After differences forbade a consensus on the issue at the last meeting, the all-powerful GST Council, headed by Union Finance Minister Arun Jaitley, has decided to impose an additional cess. It would be the difference between the current incidence and the 28 percent rate, thus not leading to an increase in the final taxation. Tobacco currently attracts about 65 percent total tax, and for aerated drinks, the current rate is about 40 percent.

Announcing the decisions arrived at on the first day of the two-day GST Council meeting, Jaitley said that the highest tax slab will be applicable to items that are currently taxed at 30-31 percent (excise duty of 12.5 percent plus VAT 14.5 percent).

Finally, the consensus is that these items, with cascading effect of 30-31 percent, will now be taxed at 28 percent, but with a rider. And the rider is that in this category, there are several items that are now being used increasingly by a very large number of people, particularly the lower middle class. So for them, a rate between 28 and 31 percent will be higher, and so, we are transferring them to 18 percent, Jaitley told reporters here.

Asked if the tax impact on the common man would be marginally lower, he replied, "Hopefully". The final list of items for each tax bracket will be worked out by a committee, Jaitley said, adding that soap, oil, shaving sticks, toothpaste and such products will likely to move down to the 18 percent bracket.

Also read : GST Council decides on 4-tier tax structure of 5-28pc

Chief Economic Advisor Arvind Subramanian said the rate structure should probably serve to lower inflation. For most items, the GST will be excise duty plus VAT, and that incidence will decide which tax bracket particular goods fall into.