Amid wide speculation on the implementation of the Goods and Services Tax (GST) from the next fiscal year, the recommendations of the panel headed by chief economic advisor, Arvind Subramanian, on the revenue neutral rate (RNR) and possible tax rates under GST seem to have come in at an opportune time. The report assumes significance as the Constitution (100th Amendment) Bill, 2015 (a key enabler for introduction of GST) is expected to be taken up in the Rajya Sabha over the next couple of weeks. While the report is yet not in the public domain, a press release summarising this report has been published.
As far as the recommendations on tax rates are concerned, the panel report (per the details available in the press release) are driven by the overall theme of larger public good. At the outset, a RNR of around 15-15.5%, as suggested in the report, is delightful news for the country, especially in view of the astoundingly high maximum rate of 27% suggested earlier by National Institute of Public Finance and Policy. The report suggests keeping the standard rate of GST for majority of goods and services at around 17-18%; this will surely be looked at very positively by the business community as well as the common man. With such a standard rate, goods should surely become cheaper as overall indirect tax incidence on most end-consumer goods (whether imported or indigenously produced) is generally over 20%—in many cases going up to even 30% of the product price. The services sector, however, will go through some initial teething troubles as services become dearer with the effective rate reaching 18% as against the current rate of 14.5%. The panel’s recommendation of not levying any non-creditable 1% additional tax on inter-state supply of goods, as was proposed in the draft GST Bill, is also much in line with the demand of the Opposition as well as the expectations of the industry. The recommendation of a lower rate of 12% on necessities is again essential for common good. The proposed rate of 40% for demerit goods, including aerated beverages, luxury cars and tobacco products may, however, be taken with a pinch of salt by the industry. Such a rate, if adopted, could pose a severe challenge for Indian market of these goods.
The structure-related recommendations in the report endorse the idea of having the GST system in place in its actual spirit. Bold recommendations, like having a wider GST coverage (by bringing in petroleum, electricity and real estate) and striving to eventually achieving a single rate of GST, underscore the very modern outlook of the panel.
Indirect tax incentives have, by far, been a popular and commonly-used mechanism for the central as well as state governments to promote investments and growth of industrial sectors of strategic importance. As a result, the present indirect tax regime is burdened with numerous tax exemptions and incentives. These tax incentives typically block the chain of free-flow of tax credits and often lead to tax controversies, thereby rendering such benefits almost ineffective for the industries that are supposedly “enjoying” them. Taking cognisance of these realities, the report makes a sensible suggestion that ‘exemption Raj’ should end in the GST era to the maximum extent possible. A wisely-designed package of tax policies and other non-tax incentives could rather be a more effective tools for to promote growth of the industry.
Further, the idea of not constitutionalising the GST rate as recommended in the panel report is pragmatic as tax rates need periodic revision in the wake of global economic pressures. Going through the rigorous exercise of Constitutional amendment each time for a tax rate increase may pose a serious challenge in meeting urgent, unprecedented economic requirements, if any—these are not a ruled-out possibility for a country the size of ours. At the same time, the report lays due emphasis on the principle that the liberty to change tax rates should not be misutilised by the government to give effect to short-term economic goals. The expectation of the panel report, that from a long-term perspective, GST should aim at maintaining a broad tax base with minimal exemptions, also matches with the indirect tax systems in leading economies across the globe.
At this point in time, the report desirably focuses on establishing a cleaner tax regime reducing the multiplicity of taxes, keeping minimum tax rate categorisation of goods and services with the aim and object of creation of a common market for all. Though not binding upon the GST Council, the overall recommendations of the report are largely in line with the desired framework for GST. In the ongoing Winter Session of Parliament, this report could prove to be an effective tool for breaking the political shackles holding back the passage of the much awaited Constitutional Amendment Bill on GST.
With contributions from Poonam Harjani, director, BMR & Associates LLP
The author is leader (indirect tax), BMR & Associates LLP