In order to compute the states’ revenues losses from the goods and services tax (GST), a 14% annual growth over the 2015-16 VAT revenue base would be assumed over the initial five years when the Centre will be obliged to fully compensate them for these losses. The broad contours of the compensation formula finalised here by the GST Council adds to the revenue base of the 11 geographically disadvantaged states what they forewent to run tax relief schemes, but not in case of other states. Also, the CST revenue in the base year with the actual rate of 2% will be added to the
revenue base, and not 4% as initially demanded by the states.
Finance minister Arun Jaitley said the 14% secular rate of growth was agreed on after discussing five different formulas to compute the states’ possible VAT revenue growth in a non-GST scenario (any shortfall from this level is eligible to be compensated)
These were a mutually agreed-upon fixed rate (which is what has come through); the average of the three best (high-growth) years in the past five years; and the average of median three of the last five years after leaving the two outliers. States had earlier turned down the Centre’s proposal for taking the average of the last three years for projecting future revenue growth, saying these years haven’t been particularly good due to the economic slowdown. The average VAT revenue growth in the five years to 2015-16 was 14.2%, while the five formulas discussed produced a broad range of 10-18%.
Cess a bad idea: Kerala FM
While the Centre has mooted a cess on “ultra-luxury items” to create a fund for compensating states in the GST regime, the states have come out against the proposal, saying it negated the principle of GST. “While the Subramanian panel had suggested a demerit rate of 40%, the Centre is now proposing a lower rate 26% for luxury items in order to create space for imposing a cess on them and mobilise resources for compensation. States want a higher rate of 30%-plus on demerit and luxury goods so that the tax rate on essential items can be brought down to 4% (from 6% proposed),” Kerala finance minister Thomas Isaac told FE. Currently, demerit goods attract more than 30%, he said. Isaac also sought a standard rate of 20%-plus.
While the crucial issue of the GST rate structure will be discussed by the council on Wednesday and Thursday, revenue secretary Hasmukh Adhia told FE that the Centre favoured a four-slab structure to start with. “We are suggesting the standard rate to be divided into two — 18% and 12%. And we propose another lower tax slab of 6% (for essential items), considering that there are about 300 items which are currently exempted from the central excise and on which VAT rate is 5%. Now, (the rate on) these items cannot be straight away taken to 12%. And the demerit goods could be brought under the highest rate of 26%,” he said. It may be recalled that the Arvind Subramanian panel had recommended a single standard rate of 18%, a 12% merit rate and a demerit rate of 40% for a clutch of items like luxury cars, aerated beverages, paan masala, etc. He also discussed the options of raising the rate on precious metals to 4-6%.
Jaitley reiterated that the GST structure won’t be inflationary, but said that while states would have adequate revenue, the Centre would need to have way to discharge its obligation of compensating states. It is learnt that the Centre mooted a cess on ultra-luxury and demerit items for this purpose, a proposal opposed by states in Tuesday’s meeting. “Apart from the existing clean environment cess, there could be an additional impost on tobacco, luxury cars and paan masala. All these put together would yield Rs 50,000 crore, which could be used for compensation. The cess proceeds would not come to the Centre and go to a different kitty,” Adhia told FE. In the case of essential and mass consumption items, there won’t be steep increases in rates, he said. Jaitley said that there would only be the least possible burden on the taxpayer.
The revenue secretary added that cess would vary from item to item and would be on end consumption except for clean environment cess. “From the clean environment cess at R400 per tonne, we are expecting Rs 26,000 crore. The idea is that existing tax burden should not come down heavily in case of luxury items. About 25% of the total taxable base would be under 26% rate, 70% of the base under either 18% or 12%,” he added.
The states taxable income to be protected — of taxes to be subsumed in GST (other imposts line stamp duty, registration fee, excise on alcohol, etc, they will continue to levy), needs to be determined in the light of R4.4 lakh crore of such income in 2015-16 and R56,000 crore of CST revenue (which will be absent in the GST regime).