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  1. Centre bows to states, may set GST rate at 20% or more

Centre bows to states, may set GST rate at 20% or more

Might be 20% or more, says will come down in long term

By: | New Delhi | Updated: August 5, 2016 6:55 AM
Jaitley and chief economic adviser Arvind Subramanian sought to flag concerns over the GST pinching the poor, with the latter pointing out that only less than 15% of the consumer price inflation (CPI) basket will likely attract the standard rate, while 54% will be exempt. Chief economic adviser Arvind Subramanian with finance minister Arun Jaitley after holding a press conference on the goods and services tax in New Delhi on Thursday

The standard rate for the goods and services tax (GST) might kick in at 20% or higher, the government indicated on Thursday, deferring to the states’ sentiments and the need to pare revenue deficits, but added that “in the long term, the rates will come down” as the tax base gets wider. Fresh from his Rajya Sabha success, where the GST Constitutional Bill was passed near-unanimously on Wednesday, finance minister Arun Jaitley has unveiled a road map for the comprehensive destination-based consumption tax, with a “stiff” pan-India roll-out target of April 1, 2017.

Jaitley and chief economic adviser Arvind Subramanian sought to flag concerns over the GST pinching the poor, with the latter pointing out that only less than 15% of the consumer price inflation (CPI) basket will likely attract the standard rate, while 54% will be exempt.

Jaitley slightly altered his earlier stance favouring a low GST rate. He said an “unreasonable” rate cap would increase the revenue deficit and referred to “the present tax incidence of 27-32%”.

The Subramanian panel, which recommended a revenue-neutral rate (RNR) of 15-15.5% and standard rate of 18% in a scenario that corresponds closest to the GST base now envisaged, incidentally, had noted that the weighted average statutory rate for goods were 8.45% and 7.5%. respectively. for the Centre and states in 2013-14. The panel had noted that RNR in the 15-15.5% range with a lower rate of 12% and a standard rate of 18% will have negligible retail inflation impact while a higher RNR (on a lower base) with merit rate of 12% and standard rate of 22% would have a significant 0.3-0.7% impact on inflation.

“For almost 60-70% of commodities, you are paying 27% tax. It will gradually slide down. But even in the first instance (when GST is implemented) it will come down from these levels,” Jaitley said. On Wednesday, Jaitley had said in Parliament that 85% of central excise revenue comes from items attracting the median 12.5% rate while 62% of the states’ VAT collections are from items under the 14.5% rate.

When asked whether the standard rate proposed by the CEA panel (16.9-18.9%) looked feasible (the Congress had insisted on putting an 18% rate cap in the GST laws during Wednesday’s Rajya Sabha debate) at the current juncture, the minister said: “It is the government’s responsibility to fund states’ losses as well as (find) its own revenue. I think what you need is an optimum rate.” He, however, admitted that the tax rate on services can’t go up steeply from the current 15%. The GST Council will decide on the rate structure.

While industry pitches for a moderate GST rate (to be applied on roughly the same base with near-equal Central and state components), tax experts aver that a moderate rate and broad tax base are a potent combination that could lead to improvement in compliance and economic acceleration, and hence a dramatic increase in the governments’ revenue. “The secret to getting more revenue is indeed not to jack up the tax rate and load the taxes onto a narrow base. The best example to illustrate the point is that of New Zealand, which witnessed a huge 42% jump in tax revenue after the roll-out of GST (over what was projected based on revenue-neutral rate calculation), thanks to a comprehensive base and a moderate rate (10%),” Satya Poddar, tax partner, EY, said.

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