The chances of the Centre finding resources for compensating the states’ revenue losses in the goods and services tax (GST) regime through a new cess on luxury and “sin” goods appeared brighter on Wednesday after most states veered towards the North Block proposal at the GST Council meet here. While many states had first denounced the idea and some like Kerala argued that it would necessitate a GST rate more benign than feasible on demerit items, the Centre pleaded that the increase in burden on taxpayers owing to the cess would be less than from a higher demerit GST rate.
Wednesday’s GST council meeting could not reach a consensus on the proposed comprehensive indirect tax’s rate structure. The Centre had mooted a “revenue-neutral” four-slab structure — 6%, 12%, 18% and 26% — along with a 4% tax on gold and claimed it had little potential to stoke retail inflation. Analysts said considering the rates and tax bases assumed, this structure would take the revenue-neutral rate to 18%, against 15-15.5% reckoned by the chief economic adviser earlier.
A tax base of Rs 12.8 lakh crore or a quarter of the total in 2015-16 would be under the highest rate of 26%, they noted. 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.
Kerala finance minister Thomas Isaac, however, gave a contrarian view. “Now the VAT rate (on merit goods) is 5%, this will be raised to 6%, why all the consumer durables which suffer a tax rate of anything above 30-48% would be come under a lower rate of 26%. This cannot be accepted. The 26% rate would have to go up significantly, and the 6% ought to be reduced to 5%.”
Meanwhile, fresh discords emerged on the issue of division of administrative authority between the Centre and states, in the light of new data presented by the West Bengal finance minister Amit Mitra. Of course, the principle that one taxpayer would be assessed only by one authority — either the Centre or state — was endorsed. But the consensus reached by the GST Council last month — under which taxpayers with turnover up to Rs 1.5 crore will be exclusively under the states, those above the threshold would be divided among the Centre and states after gauging the relative risks to each and existing service tax assessees will remain with the Centre — floundered on Wednesday.
Taxpayers with a turnover above Rs 1.5 crore contribute 90% of the revenue, even as 93% of the service tax assessees and 85% of the VAT taxpayers have a turnover below Rs 1.5 crore. Isaac said: “Now, in this meeting we brought out new numbers, which showed that even if all the dealers of services as well as goods below Rs 1.5 crore turnover is given to states, the actual increase in their assessee base would be lower than the Centre’s. So that throws a completely different light upon the issue. So it has been decided to have re-look at the entire issue.”
The crucial issues of tax rates and administrative control will be discussed by the council at its next meeting on November 3 and 4, and all other pending issued would be hopefully ironed out by November 8-9 when the council would meet again, official sources said.
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%. The rate of cess will be equal to the current tax incidence and the higher tax slab 26%. With this impost, along with a new cess on tobacco at the same rate and the existing clean environment cess (all other existing cesses will be subsumed in GST), the Centre expects to garner Rs 50,000 crore annually. The proceeds will be used to create a fund and exclusively for compensating states’ losses in the GST regime.
To justify the cess proposal, the Centre noted that it is a more efficient tool than the GST structure to mobile resources for states’ compensation. “Given the finance commission formula of 42% devolution of the Centre’s tax revenue to states, raising Rs 100 for the Centre would require tax worth Rs 172, whereas the proceeds of the cess, which need not be shared with the states, would go solely to the Centre,” said a source.
While finance minister Arun Jaitley indicated that a near-consensus has been reached at Wednesday’s council meeting on the ways to raise resources for compensating states, Isaac said: “It was agreed upon that only cess on tobacco and clean environment cess would be there for compensation. The revenue from these to the Centre would be around Rs 44,000 crore. So you still require some Rs 7,000 crore for the compensation. It was decided that the Centre would look into it.”
As reported by FE earlier, in order to compute the states’ revenues losses in the GST regime, a 14% annual growth over the 2015-16 VAT revenue base would be assumed over a period of five years. Cesses levied by the states, revenue from a 2% central sales tax rate and input tax credit reversals have been added to the definition of revenue for the purpose of computing the compensation. The revenue base of the 11 geographically disadvantaged states would also include what they forewent to run tax relief schemes.