If all exemptions are removed and petroleum, alcohol, real estate, electricity, education and healthcare are brought under the goods and services tax (GST), the tax rate for all items except the demerit goods can be as low as 12% and it might turn to be even revenue-surplus for the government with the compliance gains such a low rate will produce, according to the fine print of the recommendations put out committee headed by chief economic adviser Arvind Subramanian. Experts said the government could convince the political class of the need to bring the aforementioned industries under the GST ambit given that even as they are exempt, their input tax burden is substantial (8-9% in many cases) and a 12% tax on output with the credit facility for input taxes won’t hit them.
Calling the panel’s reasoning a “breakthrough”, Satya Poddar, CEO & country managing partner, EY India, told FE: “Exemption doesn’t mean zero tax. Exempt businesses like large private hospitals pay significant input taxes (which can’t be offset against output taxes)… The beneficiaries of the exemptions are often the rich.” As many as 300 indirect tax exemptions are currently available, causing the exchequer to lose an amount equivalent to2.5% of GDP.
The Subramanian panel has virtually demolished the NIPFP’s revenue-neutral rate (RNR) estimate of 27% and pegged it at 15% assuming tax on precious metals increases. This preferred RNR is split into an actual rate of 17-18% for most goods, 12% for merit goods and 40% for demerit items like tobacco products, luxury cars, etc. The 40% rate, which doesn’t imply any hike from the present rates, could remain in the 12% perfect GST scenario as well.
According to Poddar, the fact that tax exemptions don’t mean nil tax and they benefit mostly the rich should be reason enough for a political consensus on removing them. The industries that are now proposed to be out of the GST like petroleum, alcohol and real estate won’t feel the pinch either as tax on outputs will enable them to avail of input tax credits. A 12% tax, Poddar said, could lead to 10-15% increase in compliance which could be a sort of “gift of God” for the government as it won’t feel any pressure to reduce the tax rate to below 12%.
At this rate of tax, Indian producers would increase their global competitiveness as well. A 12% GST rate will be competitive against many countries including China where the VAT is at 17%, Germany at 19% and UK and France at 20%. Indonesia and Australia levy VAT at 10%, while Canada (5%) and Singapore (7%) levy GST at lower rates. Also, if the GST rate is set at 12%, fears of services bearing a higher tax burden than the current 14.5% would be addressed.
However, some analysts warned that for the 12% rate to be feasible, petroleum products need to be taxed at a higher rate, say, 40%. R Muralidharan, senior director (indirect taxes) at Deloitte India, pointed out that petroleum products are currently taxed in the range of 40-45% (20-25% state taxes plus central excise).
In several industries including electronics, domestically produced goods are suffering from negative protection against imports. The Subramanian panel has proposed that this be corrected to encourage domestic manufacturing.
As for area-based exemptions, the government could do away with them, said analysts, adding that the states concerned could instead give cash subsidies to the industries they want to encourage.
The panel examined the three approaches adopted by other agencies — macroeconomic data by the IMF, indirect tax turnover data by the NIPFP and the direct tax turnover data by the 13thFinance Commission task force. Of this, direct tax turnover data captured the largest tax base of Rs 58.2 lakh crore.
In the meantime, the draft GST Act, 2016, circulated by the Union government proposed a “not less than 1%” compounded tax rate without input tax credit for registered traders with less than Rs 50 lakh turnover. This scheme is not applicable for interstate sales. The draft law says that petroleum and petroleum products will not get input tax credit, indicating that these would be kept out of GST in the initial years, contrary to the demands of the Congress. The draft also proposes that tax officers can make summary assessment of the tax liability in certain cases to protect the government’s revenue interest by following principles of natural justice.
Amit Kumar Sarkar, partner, Grant Thornton India, called the suggested three rate GST structure a pragmatic and reasonable one, which would go a long way to build more enthusiastic support for GST from the industry.
Subramanian panel proposals
* An all-encompassing GST sans exemptions could be levied at 12%
* This compares with 27% proposed by NIPFP and standard rate of 17-18% mooted by the Panel itself
* Removal of tax waivers not to hit industries as tax on output will get them input tax credit