As the GST Council meets here on November 3-4, both the Centre and states seem to have hardened their positions with respect to the issues they disagree on. And they are reaching out to independent experts and the media to buttress their arguments.
While West Bengal finance minister Amit Mitra presented incontrovertible data to counter the number floated by the Centre of 11 lakh service tax assessees — the actual number is over 30 lakh — and forced a review of some agreements reached earlier on the sharing of administrative powers on indirect tax assessees during the goods and services tax (GST) regime, Kerala finance minister Thomas Isaac recently wrote in The Indian Express strongly opposing the plan to impose a cess on select demerit goods to raise the funds for compensating states in the GST regime. “The logic of reducing the tax incidence on consumer durables and demerit goods to 26% makes the GST severely regressive… The upper rate has been pegged at a lower rate so that the central government has the option to impose the cess as and when necessary,” Isaac noted, and batted for the demerit rate of 40% (on a much lesser number of items) recommended by the chief economic adviser Arvind Subramanian.
Also, there is a raging debate on the Centre’s proposal for having multiple rates for GST. In a blog post, finance minister Arun Jaitley last week defended the multiple-rate structure citing its inevitability in the present Indian context. He said that “different items used by different segments of society have to be taxed differently”. While the minister cited the example of European Union countries where the comparable value-added tax structure comprises many rates, experts point out that in most other GST/VAT countries, the single-rate system is followed and even others are converging towards this principle.
Montek Singh Ahluwalia, who was deputy chairman of the now-disbanded Planning Commission and a prominent policymaker for decades, wrote in Mint: “The proposal before the council departs significantly from what experts regard as an the ideal GST: One with a single rate with very few exemptions.” Stating that a lower rate for some goods necessitates much higher rates for others, which encourages tax evasion, he said: “About 50 countries, including many developing countries, have switched to some form of value-added taxation in the past two decades and 80% of them have introduced only one rate, with some having two or more. The European Union has multiple rates, but they have recently released a Green Paper for discussion on how to converge to a single rate.”
Defending the idea of using cess proceeds for states’ compensation rather than a higher demerit GST rate, the Centre pointed out that of every 100 rupees collected via the latter option, only 29 rupees remain with it, which makes the tax burden on businesses and consumers abnormally high. The cess mooted by the Centre is meant to apply on items currently being taxed at rates higher than the highest proposed slab of 26% and will be equal to the difference between the current tax incidence on these items and 26%. Official sources said the government has estimated the revenue shortfall given the multiple rate structure and the cess proposed, to around R50,000 crore. Independent experts, however, say that the exemptions (about 100) and the rates (4% for gold, 6%, 12%, 18%) proposed and the bases assumed have taken the revenue neutral rate to 18% or thereabouts, compared with 15-15.5% suggested by the CEA.
If the Centre’s proposal is endorsed by the council, a quarter of the total indirect tax base would be under the highest rate of 26%. Although around 35% of items are currently taxed at 27% or above — with 12.5% excise and 14.5% state VAT — when it comes to the tax base, they constitute much less. Isaac had told FE: “Now the VAT rate (on merit goods) is 5% and this is proposed to be raised to 6%, why all the consumer durables, which suffer a tax rate of anything above 30-48% now, would come under a lower rate of 26%. This cannot be accepted. The 26% rate would have to go up significantly, and the 6% rate ought to be reduced to 5%.”
On the issue of dividing the administrative powers between the Centre and states, an earlier agreement was that states will have exclusive control on taxpayers with annual turnover up to R1.5 crore (while all service tax assessees, irrespective of turnover will remain with the Centre) and taxpayers above the threshold will be shared between the two authorities, sticking to the one-authority-one-taxpayer principle principle. However, the data subsequently emerged on service tax assessee base upset the formula. States contend that the Centre would gain if the earlier plan was implemented and this issue is likely to hog the limelight in the council’s Thursday meeting.
In the GST excise duty, state VAT (along with countervailing taxes on imports), service tax, octroi, entry tax and sundry cesses levied by the Centre and states will be subsumed. States had said that by keeping the existing clean energy cess and a cess on tobacco, bulk of the funds for compensating states for any revenue loss in the GST regime could be found while other cesses are subsumed in GST.