GST overture to Didi on gold and footwear - Jaitley sticks to July 1 rollout deadline

TT, New Delhi, June 3: The Centre and the states today agreed on a 3 per cent tax on gold and fixed the rates on a range of other contentious goods like textiles, biscuits, footwear and beedis, paving the way for the rollout of the goods and services tax (GST) regime from July 1.

"We settled for a 3 per cent tax on gold," finance minister Arun Jaitley told reporters at the end of a daylong meeting of the GST Council, the policy and rate-setting body for the tax system that aims to create a nationwide common market.

The states have been sharply divided on gold: Kerala pushed for a 5 per cent tax while states like Bengal - which provides an army of artisans for the jewellery industry - wanted it capped at 2 per cent.

"It is a welcome decision," Bengal finance minister Amit Mitra said, adding that poor women would be happy that they would be able to buy gold at a reasonable price.

Most of the states were ready to roll out the GST from July 1, brushing aside criticism that industry might not yet be ready to comply with a blizzard of rules and reporting requirements to earn tax credits under the new indirect tax regime.

Bengal chief minister Mamata Banerjee had yesterday said that her government would resist the introduction of the GST until its concerns were addressed. The GST Council appeared to be conciliatory by relenting on gold and fixing the rate for cheap footwear - those priced below Rs 500 a pair - at 5 per cent.

However, Mitra continued to insist that the GST rollout ought to be pushed back by at least a month to allow the stakeholders to achieve a state of readiness .

"If the Centre forces a July 1 rollout, there will be serious problems. What is the harm in delaying it by a month?" Mitra asked.

"I will stick to the July 1 date," Jaitley told reporters, saying he was pretty sure that Bengal would come on board when the GST regime kicked off.

Footwear priced above Rs 500 will be taxed at 18 per cent. Currently, footwear priced between Rs 500 and Rs 1,000 attracts a 6 per cent excise duty while states levy a value-added tax .

Jaitley said the effective tax on footwear priced below Rs 500 was 9.5 per cent at present and products priced between Rs 500 and Rs 1,000 attracted a tax of 23.1 per cent. Shoes and sandals priced above Rs 1,000 are currently taxed at 29.5 per cent. The switch to a two-tier tax structure raises the possibility of lower prices.

The Narendra Modi government has been trying to dissuade people from buying gold and locking up its monetary value in lockers. A high tax rate on gold would steer investment away from gold jewellery to other avenues, allowing more capital to be funnelled into the economy.

"The decision to apply a 3 per cent GST on gold is an encouraging step in the current context to stabilise the industry and address the concerns of the millions employed in the industry," said P.R. Somasundaram, managing director (India) of the World Gold Council.

"Together with a customs duty of 10 per cent, the total tax on gold is still high and will continue to have an impact on the jewellery industry. This may be an opportune time for the government to cut the import duty and bring down the total tax on gold so that unauthorised imports are totally eliminated and the industry embraces transparency in letter and spirit under GST."

Suresh Nair, tax partner at EY, said: "It would be interesting to watch the gold trade's reaction in the transition phase, given that the GST rate in most states could be higher than the overall current effective tax rate on gold. States with higher VAT rates will be hoping for compensation from the Centre to bridge the gap."

The GST Council decided to fix the rate on biscuits at a uniform 18 per cent. Jaitley said the weighted average of the existing state and central levies on all types of biscuits was way above 20 per cent, which means prices could drop if the manufacturers pass on the benefit.

However, the Federation of Biscuit Manufacturers of India said: "The council should have a re-look at the rate as biscuit falls under the hygienic product and nutrient value segment and is widely distributed as part of the midday meal scheme. It is ironical that while sweets attract 5 per cent and snacks like bhujia attract 12 per cent, the council has placed biscuits in the 18 per cent category."

Jaitley said that all natural fibres, including cotton, cotton yarn, fabrics and readymade garments valued below Rs 1,000, would attract a GST rate of 5 per cent. This is the first time that fabrics are being brought within the realm of taxation. Garments priced above Rs 1,000 will be taxed at 12 per cent.

Silk and jute have been exempted from the tax.

The textile trade was unhappy that the council had decided to slap an 18 per cent levy on man-made fibres and synthetic yarn, saying it could create a problem because of an inverted duty structure with fabrics - the downstream product - attracting only a 5 per cent GST rate.

Tendu leaves and beedis would be taxed at 18 and 28 per cent, respectively, Jaitley said, adding that unlike cigarettes there will be no cess on beedis.

Rough diamonds will attract a levy of 0.25 per cent - a move designed to create an audit trail within a notoriously opaque business arena. Packaged food, solar panels and agricultural machinery will be taxed at 5 per cent .

All major levies including excise, service tax and VAT will be subsumed under the GST, unifying 16 different taxes and making India a single market.

Jaitley said the GST Council's next meeting on June 11 would resolve a couple of outstanding issues, including the tax on lotteries. Mitra said he would push for a cut in the tax rate on beedis at the next meeting.