The GST Council, that will meet here on Friday, will have the hard task of identifying the items to be exempt from the goods and services tax (GST), besides endorsing the draft rules on the council’s functioning.

The GST Council, that will meet here on Friday, will have the hard task of identifying the items to be exempt from the goods and services tax (GST), besides endorsing the draft rules on the council’s functioning. The GST’s impact on inflation and prices will hinge to a large extent on the selection of exempt items and how different the new sets of items enjoying waivers are from the current sets of goods exempt from central excise duty and state VAT. The council, sources said, would also deliberate on how grandfathering of tax sops like the area-based excise exemptions would be carried out.

Area-based excise duty exemptions, available to manufacturing units in northeastern states as well as the hill states of Uttarakhand, Himachal Pradesh and Jammu and Kashmir, cost the exchequer over R19,000 crore in FY16. At present, about 270 items are exempt from central excise duty and another 150-odd goods are taxed at concessional rates.

The revenue forgone on these sops was estimated at Rs 2.25 lakh crore in FY16. The number of items exempt from state VAT varies from state to state, but the average is around 100. (There is, of curse, some overlap of the excise and VAT exemption lists.) Though no official estimate is available on the revenue forgone on VAT waivers, some tax experts put the figure at close to Rs 1.9 lakh crore in FY16.

Chief economic adviser Arvind Subramanian had said that the general expectation was that the central list of exemptions, which is much bigger, would be brought down, to somewhat converge with the states’ list. “That was the presumption. However, the GST council has to decide whether the list of some 300 items can come down to 99 or so. For me, the narrower the list is, the better. We want fewer exemptions,” Subramanian had said. Subramanian said that a moderate GST rate won’t be inflationary although more definitive assessment of the price impact of GST on specific commodities could be made only after the council decides the rates and the exemptions. While 54% of the items are now exempt from taxes, the bulk of these might be kept outside the GST ambit also. The bottom 40% of the populace would be “more protected (from price spike) given their consumption pattern and PDS benefits”, the CEA had said.

“It would be desirable to keep mass consumption articles on the exemption list under GST or at least at a very low band of say 4% to 6% under in order to minimise the new tax’s inflationary impact,” said MS Mani, senior director at Deloitte Haskins & Sells.

In its first meeting held here last week, the GST Council decided that the exemption threshold for businesses in the GST be a turnover of Rs 20 lakh for all states except the northeastern ones and the three hill states where the limit would be Rs 10 lakh. It also decided that states will have exclusive control over units with annual turnover up to Rs 1.5 crore while in the case of bigger businesses too, the one-taxpayer-one-authority principle will be retained and either the Centre or the state concerned will be accorded the assessing power based on risk profiling.