These are the Loopholes in GST Rates

The introduction of GST (Goods and Services Tax) in India on 1 July 2017 has been proclaimed the greatest tax reform in independent India. GST now replaces several other taxes such as the VAT, Central Excise Tax, Service Tax etc. The system placed all goods and services under different tax slabs - 0%, 5%, 12%, 18% and 28%. A few items such as tobacco products attract an added “sin” tax over the highest GST slab. While the introduction of the GST has managed to bring most traders into the tax dragnet and allowed to implement uniform GST tariff for services and goods throughout the country, the system also comes with several loopholes.

One of the greatest loopholes in the GST system is the differential tax imposition on goods depending on their cost price. For example – the applicable GST rate on readymade garments and apparel which are priced up to INR 1,000 is 5%, but the GST on apparel that costs over INR 1,000 is 12%. Similarly, footwear that is priced below INR 1,000 has a GST of 5%. All other types of footwear are taxed at 18% GST.  This gives traders the chance to bill parts of the same garment set (such as skirt and blouse) or even bill single shoes (of a pair) separately to bring down the GST. This is also one of the points that critics often cite about GST. The idea of GST is to place goods with the same HSN (Harmonised System of Nomenclature) in the same tax slab.

Another major loophole pertains to the GST registration requirement itself. Under the new tax regime, those with a taxable turnover of under INR 25 lakhs are not required to register for GST in India. Also, a person with a registered GST can sell goods worth INR 2.5 lakh per month to an unregistered purchaser. Now if someone purchases goods worth INR 2.5 lakhs from a wholesaler but does not have a registered GSTN the audit trail disappears at this point. The seller will still be eligible for input credit and the buyer may go on to sell the products further at a discount (since he is not liable to pay GST). This can be tackled by making it mandatory for small business owners to register for GST online.

The idea of introduction of the various GST slabs was to categorize goods and services based on their consumption and need. The basics and essentials are to be placed in a low tax slab while luxuries in the higher slabs. The imposition of 12% on something as essential as sanitary pads is incentive for smaller companies with dubious tax practices to provide the same goods but skimp on the quality.