CGA panel for main GST rate at 17%-18%

By: | Updated: December 5, 2015 10:45 AM

The political cloud over the Goods and Services Tax (GST) hasn't really lifted, but the government has made its case more compelling for the Opposition and industry: a designated committee on Friday suggested the standard GST rate at an attractive 17-18%, a level that seems competitive at least among some emerging market economies and against the EU.

Goods and Services TaxThe committee, with the principal mandate to define the revenue-neutral rate or RNR for GST, put it at 15-15.5% with a strong bias against keeping exemptions and preference for the lower end of that, after approaching the goal in three different ways. (Reuters)

The political cloud over the Goods and Services Tax (GST) hasn’t really lifted, but the government has made its case more compelling for the Opposition and industry: a designated committee on Friday suggested the standard GST rate at an attractive 17-18%, a level that seems competitive at least among some emerging market economies and against the EU. It also voted against burdening the Constitution with the minutiae like the tax rates which should rather be a political choice and change with circumstances. The committee, headed by Chief Economic Advisor Arvind Subramanian, also pitched for replacing all extant taxes on inter-state trade with GST and denounced the idea of a 1% additional tax to help “manufacturing states.”

The committee whose the principal mandate to define the revenue neutral rate (RNR) for the GST, put it at 15-15.5% with a strong bias against keeping exemptions and preference for the lower end of that, after approaching the goal in three different ways. The RNR, which as the same suggests would preserve the revenue levels for the Centre and states and hence not fan inflation, will manifest itself in three rates – apart from the standard rate, there would be a “low rate” of 12% for essential goods and a demerit rate of a prohibitive 40% on tobacco products, aerated beverages, luxury cars and the like. The rates, of course, will comprise both the Centre and state components with a slightly higher share for the latter – in case of the standard rate, for instance, a 17% rate would include the states’ 9%.

Precious metals that currently enjoy concessional rates of around 1%, the committee suggested, could be subjected to higher levies (up to 6%), to avoid the standard GST rate climbing to 20%, an eventuality that could distort the economy and lead to inflationary pressures.

gR9

Addressing media persons after submitting the report to Finance Minister Arun Jaitley in his Parliament building office, Subramanian said the policymakers’ goal should be to make the GST as “broad-based” as possible, implying the need for a early re-look at the plan to keep petroleum products, real estate, electricity and alcohol outside the ambit of the proposed comprehensive indirect tax. Education and healthcare, to be exempt initially, would also need to bought under GST without much delay, he said, adding that the India should strive towards a one-rate structure in the medium term. “The design of  GST cannot afford to cherry-pick (among items for the purpose of differential tax rates) as that would undermine the objective of GST.” the committee said.

Stating that the GST rate proposed could still be slightly “on the higher side,” as compared to developed countries and even some emerging market economies (EMEs), Subramanian said the pan-India GST system that would militate against cascading of taxes, would have a “self-policing” trait and provide  a “historic opportunity to Make in India by Making One India.”  “If you look around the federal systems in the world that have implemented VAT, it is remarkable how ambitious the Indian GST can be. The Indian GST would be the cleanest VAT that combines the best of centralised and decentralized systems in other countries,” he said. 

Gr8

Experts welcomed the low GST rate proposed by the panel and so did the industry. Rajeev Dimri, leader-indirect tax, BMR & Associates, said, “The recommended GST rate of 16.9-18.9% is hugely welcome though the demerit rate of 40% looks to be on a much higher side. The Government’s continued action to push the GST bill through has reignited the hopes of the country that the GST may see the light of the day some time during the next fiscal year, if not from April 1 itself. Doing away with 1% additional tax is a welcome move and may pave an easy way for GST to come through.”
According to Subramanian, the GST system, once implemented, should be evaluated only after 1-2 years. If there is, for instance, a revenue shortfall in the first six months, that must lead to hasty rate hikes.

The Subramanian panel examined the three approaches adopted by other agencies—macroeconomic data by the IMF, indirect tax turnover data by the NIPFP and the direct tax turnover data by the 13th Finance Commission task force to determine the RNR. Of these, direct tax turnover data captured the largest tax base of Rs 58.2 lakh crore for projecting a 12% RNR and a 14% standard GST rate. Indirect tax turnover data captured a tax base of Rs 39.4 lakh crore for estimating a 17.7% RNR and a 22.8% standard rate. The IMF approach forecast a 12.6% RNR and a 14.7% standard rate on a tax base of Rs 55.1 lakh crore.Vivek Mishra, Leader Indirect Tax, PwC India said: “One thought that 18% was an unrealistic rate, when it first surfaced. The RNR committee has now recommended a standard rate of 17% to 18%. This is quite a stunning development. The only caution that I would sound is that there is a mention of a higher rate for luxury goods. We would have to see how wide is the definition of luxury goods.” R Muralidharan, Senior Director, Deloitte, said, “The standard rate of 17 to 18% would bring cheers to the industry as this would be considerably lower than the 25% tax incidence presently applicable on many products. The lower rate of 12% would be equally welcome, but the cause of concern would be the increased service tax rate of 17 to 18% and the higher rate of 40% applicable on select products.”.

The revenue foregone by the Centre alone owing to indirect tax exemptions is an annual Rs 3.2 lakh crore, which is equivalent to 2.5% of the GDP. These include area-based exemptions available for industries in Jammu and Kashmir, Northeastern states, Uttarakhand and Himachal Pradesh. The benefit for J&K is set to expire in 2020, while that for Northeastern states in 2017.

Once the RNR is known, the GST Council will have to determine the rates for different products on the basis of political and policy considerations. The GST Constitutional Amendment Bill, cleared by the Lok Sabha in the last session of Parliament, is currently pending in the Upper House, where the ruling NDA doesn’t have a majority and so the passage of the Bill is contingent on the Congress supporting it.

available for industries in Jammu and Kashmir, Northeastern states, Uttarakhand and Himachal Pradesh. The benefit for J&K is set to expire in 2020, while that for Northeastern states in 2017. 

Once the RNR is known, the GST Council will have to determine the rates for different products on the basis of political and policy considerations. The GST Constitutional Amendment Bill, cleared by the Lok Sabha in the last session of Parliament, is currently pending in the Upper House, where the ruling NDA doesn’t have a majority and so the passage of the Bill is contingent on the Congress supporting it.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition