Touted as an economic reform that could enhance the country’s GDP by 2%, India’s transition into a GST regime appears imminent. In the context of the GST introduction, there is at present a fair amount of discussion on what the revenue-neutral rate (RNR) of GST would be or should be. RNR is that GST rate which would ensure that the Centre as well as the states’ tax collections are preserved.
A task-force appointed by the 13th Finance Commission had recommended a single GST rate of 12%, comprising 7% for state GST and 5% for central GST. The model, however, assumed that all prevailing indirect taxes will be subsumed by GST and that GST shall apply on all goods and services with exemptions being minimal. This was followed by another proposal of staggered central and state GST rates, finally culminating into a GST rate of 16% (comprising of a state GST of 8% and a central GST of 8%).
However, recent reports indicate that a sub-committee, comprising both central and state officials, has recommended an RNR of almost 27% comprising the central GST@12.77% and the state GST@13.91%.
This is roughly the aggregate of the Centre’s and state’s indirect tax rates (i.e. excise duty of 12% and a VAT of 14%) that prevail on standard goods with the difference that this rate will not be cascading. This proposed rate (arrived at basis FY12) is expected to be reviewed and validated by the Empowered Committee based on the current indirect tax collections. Also, the inclusion or otherwise of petroleum under GST (a major revenue earner for the states) as well as the threshold for GST may affect the RNR. Recent news reports also indicate that the National Institute of Public Finance and Policy (NIPFP) tasked with recommending an RNR for GST has suggested as many as 16 rates, corresponding to different scenarios. While details of these recommendations are yet to be published, it appears the suggestions include a three-rate GST, a four-rate GST and a two-rate GST under scenarios of subsuming and excluding different taxes such as entry tax and central sales tax as also items such as petroleum, sugar and textiles.
It is a general belief that an ideal GST design should boast of a wide tax base with a low or moderate tax rate. The standard GST rate across the world is in the region of 16-18%. Only certain Scandinavian countries have implemented GST rates at 25%; however, this is commensurate with the high degree of compliance and enforcement system as well as social security measures prevalent in these countries. Further, most countries have a 2- or 3-tiered rate system of 0%, a merit rate in the region of 6-8% and a standard rate in the region of 16-18%.
Against this backdrop, the proposed combined GST rate of 27% appears to be rather high with the following potential impact on the industry.
The key impact is likely to be felt by the services sector with services set to attract 27% GST as opposed to the 12.36% service tax. While additional credits should be available to a service provider under GST (i.e. GST credits on purchase of goods), potential cash-flow impact of the higher levy would need to be evaluated and addressed.
In the event a merit or lower rate of GST is not applied on essential goods and services, a fair bit of impact could be felt by goods currently attracting concessional rate of excise duty (6%) and a merit rate of VAT (5-5.5%).
In general, a trader is set to gain on the account of potential service tax credits under GST. Potentially, the least impact should be felt by a manufacturer engaged in the sale of goods currently attracting the standard rate of excise duty and VAT. While inter-state sales are set to attract a higher GST rate as compared to the present tax rate (excise duty/countervailing duty of 12% plus CST of 2%), the higher GST, unlike CST, should be fully creditable.
Even where the rate increases in absolute terms, the effect of potential increase in credits on the input side would need to be factored in while revisiting pricing strategy under GST. Specifically, the possibility of customers negotiating a price reduction in the light of GST’s additional credits being available to the supplier would need to be considered.
As things stand, the basis for an RNR of 27% is not fully clear and it is expected that, once the Constitution Amendment Bill is passed, the GST Council will decide on the final rate. Till then, the speculation on the ideal GST rate is set to continue.
While fixation of an appropriate RNR is of immense importance from the government’s perspective, from the industry and taxpayer’s perspective, the expectations around an ideal GST rate include a uniform GST rate for goods and services, a reasonable RNR with no more than 2-3 slabs (possibly 0, merit rate and standard rate) and uniformity in the GST rates across states.
It is hoped that India borrows international best practices on this front which favours simplicity, uniformity and reasonableness in the administration of GST.
By Rajeev Dimri
(With inputs from Jayashree Parthasarathy, director, BMR & Associates, LLP)
The author is partner, BMR & Associates, LLP. Views are personal