GST panel says no to placing mobiles in declared goods list
State governments, which had increased value added tax (VAT) rates by one to two percentage points beginning 2009, and have hence reported higher revenue growth than the Centre, are considering another round of hike in this tax, their principle revenue source.
In what reflects the inability of the Centre to convince the states to stick to the principle of lower tax rates and broader taxpayer base to accelerate revenue growth, the empowered committee (EC) of state finance ministers, which met for two days here, seriously weighed the option of raising the VAT rate for merit goods to 6% from 5%.
State VAT rates were originally fixed at 4% (for merit goods) and 12.5% (the residual rate applicable for most items) when this system was introduced in April 2005. These rates were hiked to 5% and up to 14.5%, respectively, by some states in 2009 and others subsequently.
While the merit rate is applicable to a lesser number of goods ? healthcare, information technology goods, industrial inputs etc ? the residual rate is applicable to a larger number of goods. In terms of revenue potential, however, merit goods have a significant role.
The once-aborted plan to levy VAT on sugar and textiles is also under active consideration, with the EC asking a sub-committee to look at the pros and cons of such a move. Until 2006, the Centre used to impose additional excise duty in lieu of sales tax (the rate was originally 4% but was subsequently reduced to 2%) under a central Act on these commodities.
The states used to get one percentage point additional share from the Centre from the divisible pool of its tax proceeds on account of this central tax. The tax rate was reduced to nil at a point and subsequently the Act itself was abolished. To compensate for this, the 13th Finance Commission raised the states? share of the Centre?s tax revenue to 32% from 30.5% earlier. Despite this, some states subsequently made an attempt to levy VAT on these items to compensate for the lost revenue, but backtracked in the face of protests from the industry.
State finance ministers on Saturday, however, rejected the Union government proposal to include mobile phones and tablets in the ?declared goods? category to limit the state VAT on these gadgets at 5%, saying that low-priced phones are anyway out of the state level tax.
Bihar deputy chief minister Sushil Kumar Modi, who chairs the empowered committee of state finance ministers, told reporters here that 20 states levy only 5% VAT on these items and only seven states levy more than that.
Tamil Nadu levies 14.5%, while Gujarat, Madhya Pradesh, West Bengal, Chhattisgarh and Delhi levy more than 5%. States are dissatisfied with the fact that while the Union government increased the central excise duty on mobile phones priced above R2,000 from 1% to 6% in Budget 2013-14, it was not fair to ask states not to tax them. Union telecom minister Kapil Sibal had proposed to include these products in the declared goods list.
?The EC is of the firm opinion that nothing should be kept in the declared goods list. When the proposed goods and services tax (GST) comes into force, the list of declared goods should be done away with,? said Modi. He added that low-priced mobile phones are not taxed by states.
States allege that the Centre has protected its revenue receipts from sugar and textiles items by increasing the excise duty on them. States that tried to mobilise revenue from these products by levying VAT had to roll back the tax on account of protests from the industry. The sub-committee will look into the issue and suggest ways to improve revenue receipts from these items. States, however, successfully managed to offset the revenue loss in the case of tobacco, the additional excise duty on which was also withdrawn by New Delhi.
States also want the central government to have a relook on the withdrawal of income tax exemption on the revenue they mobilise from state-owned public sector enterprises by way of taxes.
Modi said he is set to meet officials from north-eastern states to examine their concerns regarding GST. The central government has, in the meantime, started working on a draft model GST Bill, incorporating the latest position of the central and state policy makers.
