Many government panels and independent experts had in the past put the revenue-neutral rate (RNR) for an all-encompassing goods and services tax (GST) between 12% and 20%, but Delhi-based think tank National Institute of Public Finance and Policy, asked to compute the RNR for GST exclusive of petroleum taxes, recently mooted a higher rate of 27%.
States have now said the GST rate ought to be still higher, casting a cloud on the new tax’s potential to reduce the incidence of taxes on businesses without having an adverse effect on the exchequer. “States are of the view that 27% is not enough and the empowered committee (of state finance ministers) is yet to approve this recommendation (made by NIPFP),” KM Mani, Kerala’s finance minister who was recently made the chairman of the empowered committee, said on Friday.
The states’ demand for a higher GST rate (which comprises nearly equal Centre and state components on roughly the same universe of transactions) is obviously to avert any revenue loss to them during the initial period of the GST regime. The states’ stance is despite the Centre promising a GST compensation regime, supported by a proviso in the GST Constitution (122nd Amendment) Bill, pending in Parliament.
Mani said that the empowered committee will meet on May 7 and 8 in Kerala to discuss reports submitted by various sub-panels regarding GST on inter-state transactions (IGST), place of supply rules, registration of dealers and refunds. The empowered committee is expecting recommendations from two more panels on issues like GST returns and tax payments.
NIPFP recommended a composite RNR of 26.68% for GST taking 2011-12 as the base year for its revenue projections but has been asked to update it with the latest (2013-14) figures of economic output. The proposed tax rate consists of two components — 12.77% central GST or CGST and 13.91% state GST or SGST.
The GST rate recommended by NIPFP is the same as the combined (marginal) central and state taxes on goods at present but it is lower than the combined central and state taxes on services of 28.5%, which would apply once the Finance Bill, 2015, is passed.
In the Union Budget, finance minister Arun Jaitley raised excise duty to 12.5%, subsuming the education cess, and proposed to raise service tax to 14% as a prelude to introduction of GST.
Jaitley also provided for an extra 2% Swachh Bharat cess on service tax that when notified could make service tax rate to 16%. States apply 14.5% value added tax (VAT) on most of the items.
Ideally, the rates for GST, which captures a much larger tax base, ought to be significantly lower than current rates and bring concomitant additional competitive strength to the economy.
The states had in 2010 opposed a much lower GST rate of 12% (7% for SGST and 5% for CGST) proposed by a task force associated with the 13th Finance Commission, calling it too low and impractical. Some other agencies have since recommended relatively higher rates but most still lower than what the states’ panel has now suggested.
Of course, the task force assumed a much larger base of Rs 31,25,325 crore at the then prevailing prices (given inclusion of most products including petroleum in the GST) while the states’ panel has assumed exclusion of petroleum from GST and took the values of 2011-12.
Globally, the average GST/VAT rate is around 16.4%. The average rate in Asia-Pacific is 9.88% and Canada and Nigeria have the lowest rate of 5%.
The proposed combined RNR of 26.68% for GST would mean that India won’t have any competitive advantage over most of its leading trading partners, sources said.
“GST is proposed to be introduced from April 1, 2016. We will try to stick to that schedule,” said Mani.
The chairman said the interests of all the states would be protected while making the transition to GST. “Gujarat has certain apprehensions and certain states have certain other apprehensions. We will address them. We will safeguard the interest of all the states, producing states and consumer states,” he said.
The Centre introduced the Constitution (122nd) Amendment Bill in the Lok Sabha last December and it is expected to be debated during the current session of Parliament.
Not good news
* States say the GST rate ought to be still higher
* Driven by fear of losing revenue in early years of GST
* Casts a cloud on the roll-out of the new tax
* Earlier panels suggested RNR of 12% to 20%
* Empowered committee of state finance ministers to meet again on May 7 and 8