A substantial part of the government's revenues come from taxes - direct and indirect. The direct tax is the income tax that companies and individuals pay on their annual income.
In India, the income tax payers are a small proportion of the total population but indirect taxes are paid by nearly everyone on a daily basis. From buying milk to taking a taxi ride to shopping and eating at a restaurant, the government currently charges taxes either in the form VAT or service tax.
From July 1, both these indirect taxes will be merged into one system - Goods and Services Tax (GST). It has recently come out with four tax slabs - 5 per cent, 12 per cent, 18 per cent and 28 per cent - under which goods and services will be taxed. A total of 1,211 items have been categorized with a substantial chunk of items falling under 18 per cent slab.
Here's how GST would affect the cost of some goods and services:
On air travel
The cost of travel for economy class passengers is likely to remain same. While the government has reduced the rate of taxation from 6 per cent earlier to 5 per cent (for economy class seats), the change in provisions of input tax credit (credit received for the tax paid on the inputs used in the product) will actually bump up the overall tax outgo for airlines. In the current competitive scenario, the airlines are not expected to pass on increased tax burden to passengers as it might affect their occupancy rates. For the business class passengers, the cost of travel might increase marginally. For instance, the GST on business seats will be 12 per cent as against 9 per cent now.
On eating out
The government seems to favour home cooked food. Under the new GST system, the restaurants are broadly divided into two areas: non-AC and AC restaurants. In both cases, there's sharp jump in the tax rates. For instance, dining out in AC restaurants will attract tax of 18 per cent as against 10.6 per cent charged (including VAT and service tax) now. For low-cost restaurants, the tax rate would be 12 per cent as against 6 per cent now.
On going for vacation
This is one area where the high-end customers are likely to bear the brunt. The taxation of hotels is a state subject currently. With GST, this is going to change. The current tax rate on hotel rooms ranges from 18 per cent to 25 per cent. Under GST, the hotels will be classified into four slabs: tariff of below Rs 1,000 per night; Rs 1,000 to Rs 2,500; Rs 2,500 to Rs 5,000; and above Rs 5,000. Each category has a different tax rate with rooms above Rs 5,000 per night falling in the highest tax slab of 28 per cent. Rooms below Rs 5,000 tariffs are likely to cost cheaper than the current rates.
On movie tickets
The moviegoers can cheer a bit. The entertainment tax will be replaced with GST. The average entertainment tax varies between 35 and 55 per cent, depending upon the state. Going forward, there will be 28 per cent GST charged on cinema tickets. However, states will still have the right to levy local charges on top of GST rate.
On mobile phones
Nearly 80 per cent of the mobile phones sold in India are assembled in the country. Till now, the tax rate for local mobile manufacturers is 12.5 per cent, however, they were getting countervailing duty of 11.5 per cent, which effectively brought the overall tax burden to around 1 per cent. The new GST regime imposes tax of 12 per cent on such mobile phones. Given the steep hike in tax rate, domestic handset makers are expected to pass on the higher tax burden to end consumers. Domestic handset makers don't just include homegrown companies such as Micromax, Karbonn, Lava and Intex but also Chinese players like Xiaomi, Vivo, and Lenovo who also assembles phones in India.