1. Editorial: Getting to ideal GST rate

Editorial: Getting to ideal GST rate

If half of consumption not taxed, rate will be high

By: | Published: November 24, 2015 12:34 AM

With the National Institute of Public Finance and Policy’s (NIPFP) estimate of the revenue-neutral rate (RNR) for GST—it submitted its report to the empowered committee of state finance ministers recently—reportedly at 23-25%, there is talk of how the rate is too high, of how this will not incentivise states to move to GST; and we’re not even talking of the Congress party which has made it clear it will not support a GST Bill unless the RNR is low. As is natural, there is a comparison with the 12% rate that a committee under Vijay Kelkar had recommended. Much of the debate is a sterile one since, at the end of the day, the RNR calculated by anyone—including a committee under chief economic advisor Arvind Subramanian—depends upon the assumptions made. Between the central and the state governments, around R8,90,000 crore was raised in terms of excise and service tax and VAT in FY15, or around 7.1% of GDP. If every item of production in the economy was taxed, the RNR would be a simple 7.1%. If you apply this to only private consumption expenditure, the RNR works out to 11.8%. If you apply it to all GDP but remove that part of GDP which is either not taxable (like agriculture) or is unreachable because it is in the informal tax—the two add up to 60% of private consumption—and look at what part of government expenditure and investment gets taxed, and you’ll come to the RNR of 18-19%. So, if NIPFP, or anyone else, were to assume that these exemptions were not going to apply, the RNR will fall dramatically.

A lot now depends on whether a single rate is being used or whether some goods and services are to be taxed at a lower rate. If the RNR is 20% and half the goods and services are to be taxed at a ‘merit’ rate of 12%, this means the non-merit goods and services will have to be taxed at 28%. Reduce the merit list to around 20%, and the non-merit goods and services will be taxed at a much lower 22%. Which is why, even in the case of NIPFP, the RNR is a much lower 18-19% in case just one single rate is charged across all goods and services. Indeed, if a uniform rate is charged, the chances of tax evasion also reduce dramatically. Today, for instance, in the case of coconut oil, if it is sold in a container of a certain size, it is treated as hair oil and taxed as a cosmetic, at a higher rate. If, however, it is sold as a cooking medium, the rate is lower—imagine the scope that throws up for tax evasion. Which is why, getting into what the RNR will be—Subramanian’s report is due around now—is really a mug’s game; once GST is introduced, and more and more items are included under its purview and taxed at a uniform rate, tax evasion will reduce and, with it, the RNR will also come down.

  1. No Comments.

Go to Top