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February 25, 2023

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Basics of GST

Two tax slabs for services likely; Council is examining proposal

Two Tax Slabs for Services: GST Council Proposal Explained

The Goods and Services Tax is levied on several services required by both individual citizens and business entities. There used to be various Goods and Services Tax rates, such as 5%, 12%, 18%, and 28%, before the introduction of the new rate structure by the GST Council, which could confuse customers.

The Council has announced the introduction of two rates: 5% and 18%. A special 40% rate has also been recommended for selected demerit goods and services.

What are the slabs for GST tax for services?

The GST system has two slabs only: 5% and 18%. A 5% slab is applicable for some common services, while 18% will be the standard slab rate for the majority of services.

It should simplify GST application. Yet the rate depends on the service itself and its tax rules.

Also Read: GST slabs and applicable rates

Which services can come under 5% GST?

Some common services can come under the lower 5% GST rate. They include specific services like gyms, salons, barbershops, and yoga centers under the prescribed guidelines.

Hotel accommodation services costing up to ₹7,500 per unit per day were further lowered to 5% from 12%. This comes with some conditions; businesses are advised to verify the latest GST norms before using the 5% rate.

What about the 18% GST rate?

The 18% GST rate is still applicable to many services. Several professional, technical, and business services, including legal and accounting services, can come under this rate.

The new structure does not mean that all services will have 5% GST. Businesses must check the type of service and the applicable GST rules before choosing the correct rate.

Why Is GST Being Simplified?

The main aim is to make GST easier to understand and manage. A simpler rate structure can also make billing and accounting easier for businesses.

Businesses may find it easier to:

Select the correct GST rate
Prepare invoices
Calculate GST
Maintain accounts
Manage GST records
Reduce mistakes

Customers will also get their share of advantages if a certain service is reduced from a high rate to a low rate

How Is the Change Going to Affect Service Enterprises?

The effect will vary according to the nature of the business. Where there is a change from 18% to 5%, customers will be able to enjoy GST at a lower rate. For instance, GST on a ₹10,000 salon service will now be ₹500 (as against ₹1,800).

Input tax credit for services with 5% GST should also be considered.

Simple GST Calculation Example

We will consider a simple example for you to understand.

Assume that a service charges you ₹10,000.

If there is 18% GST, then the GST would be

GST = ₹10,000 × 18% = ₹1,800

The customer will pay:

₹10,000 + ₹1,800 = ₹11,800

If there is only 5% GST, then the GST would be

GST = ₹10,000 × 5% = ₹500

The customer will pay:

₹10,000 + ₹500 = ₹10,500

The above example demonstrates the effect of reduced GST on the total bill.

What Should Service Businesses Do?

Businesses should check their GST rates carefully before making any changes. They should check the latest GST notification and confirm the correct classification of their service.

They should also check the input tax credit rules and then update their invoices and billing system as needed.

They may also need to update:

Invoice formats
Accounting software
Product or service prices
GST settings
Customer communication

This can help prevent wrong GST calculations.

Does the Two-Slab System Apply to Every Service?

The two-rate structure does not mean every service will automatically have 5% or 18% GST. Some services may be exempt, while others may have special rules or conditions.

The GST rate is dependent upon the nature and categorization of the service itself. Companies need to look at the most recent GST rate chart before doing anything.

What is the 40% GST rate?

The GST Council has also recommended a special 40% rate for selected demerit goods and services. This rate is separate from the main 5% and 18% structure and applies to specific categories.

For services, 5% can apply to selected services, while 18% remains the standard rate for many others. Some special categories may have different GST rules.

Why Is Correct GST Classification Important?

Correct GST classification is important for businesses. Using the wrong GST rate can cause invoice errors and problems during GST returns or tax checks.

Also Read: GST rate and HSN code for services

For example, if a service should have 18% GST but the business charges 5%, it may have to pay the extra tax later, along with possible interest. Businesses should always check the correct GST rate before changing their invoices.

Conclusion

The GST Council’s suggested rate slabs would ensure that GST becomes easier to implement for companies and buyers. In the case of services, 5% and 18% are the two basic slabs, out of which 5% may be applicable on some selected services, whereas 18% is the regular slab rate for other services. A separate 40% slab rate is suggested for selected demerit slabs. Businesses need to ensure correct classification of service, GST rate, and ITC guidelines before making any change in billing practices.

FAQs

1. What are the two major GST rates for services?

Two major GST rates for services include 5% and 18%, where the former is charged on specific services, and the latter is a standard rate.

2. Which services can come under 5% GST?

Selected services such as certain beauty, wellness, and hotel accommodation services can come under 5% GST, subject to the applicable conditions.

3. Is 18% GST still applicable to services?

Yes. Many professional, technical, and business services continue to attract 18% GST.

4. Is there any possibility of taxing all services at 5% or 18%?

No. The Goods and Services Tax will depend on the nature and classification of the service.

5. What should be done by businesses after GST rate changes?

They should verify the new GST notification, determine the service classification, look for ITC provisions, and make changes to their invoices and billing process.

6. Will a reduced GST rate lead to a full claim of ITC?

Not always. Some services under the 5% rate may have restrictions on input tax credit. Businesses should check the specific conditions that apply.

Also Read: input tax credit rules under GST

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