The Centre is likely to offer a sweetener to goods that go out of the exempted list for excise once the goods and services tax (GST) kicks in next year. While identifying the list of products that will go out of the 350 item list, the Union finance ministry is looking at levying a lower rate of tax under the new regime.
The Centre has already acceded to the demand from the states to settle for a two-rate structure, with essential items facing a lower rate of tax. Most of the items that come out of the exempted category would be treated on a par with essential goods and would face a lower levy, said a senior government official on condition of anonymity.
Unlike the Centre, the states are, however, unlikely to make significant changes to the list of 99 items that are at present exempted from the value added tax (VAT).
“Many exempted items are likely to be taxed at a lower rate in GST. It will be difficult to straightway tax zero-tax items at 16 per cent or above in GST,” said Pratik Jain, executive director (indirect tax) at consultancy firm KPMG. He added it would be difficult for states to exempt over 90 items under the GST regime.
Food items such as curd and butter milk and certain textile products might be taxed at a lower rate in GST, but branded food items, footwear and most information technology products were likely to attract the standard rate, Jain added.
Another government official said the exemption list would be common for the Centre as well as the states and states would not be allowed to expand the exemption list even for goods of local importance. The list would be substantially reduced over the years to minimise exemptions.
“The Centre has agreed to most of the demands of the states but it will not agree on different exemptions and different thresholds. The different exemption list would lead to distortions,” the official added.
While the empowered group of state finance ministers had suggested that the existing exemption lists of the states and the Centre continue in GST, the task force of the 13th Finance Commission had suggested only five exemptions — public services such as civil administration, defence and police; employer-employee transactions; unprocessed food sold under the public distribution system; education services provided by non-governmental bodies; and health services offered by non-governmental agencies.
In Australia, health and medical care, educational supplies and childcare, fresh food and beverages are exempted from GST. Tax-exempt goods and supplies in Canada include basic groceries, prescription drugs, transportation, medical devices, health and dental care, educational and financial services. Singapore exempts sale and lease of residential property, financial services and exports of goods.
India might draw upon the experience of these countries while finalising its list of exempted items.