Lower rate, scrap 1%: Panel helps Centre’s GST hardsell

By: | Published: December 5, 2015 7:55 AM

A government panel headed by Chief Economic Adviser Arvind Subramanian set up to decide on the goods and services tax (GST) rates has recommended a revenue-neutral rate (RNR) of 15-15.5 per cent, with a standard rate of 17-18 per cent that is to be levied on most goods and all services.

gst bill in rajya sabhaThe Constitution Amendment Bill, popularly known as the GST bill, is pending clearance in the Rajya Sabha and is expected to be tabled in the ongoing Winter Session. (Reuters)

A government panel headed by Chief Economic Adviser Arvind Subramanian set up to decide on the goods and services tax (GST) rates has recommended a revenue-neutral rate (RNR) of 15-15.5 per cent, with a standard rate of 17-18 per cent that is to be levied on most goods and all services. The revenue-neutral rate — the rate at which there will be no revenue loss to the Centre and states in the GST regime — prescribed by the panel is much lower than the 18 per cent demanded by the Opposition.

The panel has also backed the scrapping of a controversial proposal of a 1 per cent additional levy by states on the cross-border transport of goods, a move that could help the government strike a deal on the GST with the Congress, which has opposed this levy.

The proposed sales tax seeks to transform the country into a common market by streamlining state and Central taxes and has been touted as the biggest tax reform since Independence, which could add as much as 2 percentage points to the India’s GDP. The rate of tax is a crucial factor in the roll out of the GST as a rate that is too low could have revenue implications for both the Centre and states while a high rate of tax could hit compliance.

Speaking to reporters on the sidelines of a panel discussion organised by NITI Aayog, Minister of State for Finance Jayant Sinha said the set of numbers in the CEA report will go to the GST Council and then important policy decisions will have to be made on some of these parameters. Asked if the government will start fresh talks with the Congress, Sinha said: “We are always in discussion and consultations with our colleagues. We are hoping very much that early next week, we will able to continue our discussion and consultations.”

In its report submitted to finance minister Arun Jaitley, the committee recommended three rates for goods: a 2-6 per cent rate for precious metals, a 17-18 per cent standard rate for goods and services and a low rate of 12 per cent for mass consumption goods. The standard rate would apply to most goods and services under the new indirect tax regime. A high demerit rate of 40 per cent — on luxury goods and tobacco — has also been recommended by the committee.

The controversial one per cent tax had been proposed in the Constitution Amendment Bill to bring in manufacturing states such as Gujarat, Maharashtra and Tamil Nadu on board. The panel has said it is not in line with the objective of Make in India. This was one of the eight demands made by the Congress in its dissent note to the Rajya Sabha select committee, which submitted its report early in May this year.

“Because the prerogative of deciding the precise numbers will be that of the future GST Council, this Committee has chosen to recommend a range for the RNR rather than a specific rate… in line with growing international practice and with a view to facilitating compliance and administration, India should strive toward a one-rate structure as the medium-term goal,’’ the executive summary of the report submitted by the committee stated. Demerit rate would be applicable on products including luxury items like cars, aerated beverages, paan masala, and tobacco and tobacco products while it will not include petrol and alcohol, which are outside the purview of the proposed GST.

However, the CEA-led committee opposed the inclusion of tax rate or list of exemptions in the Constitutional amendment Bill on the grounds that “the credibility of the macroeconomic system as a whole is undermined by constitutionalising a tax rate or a tax exemption.”It argued that setting a tax rate or an exemptions policy “in stone for all time,” regardless of the circumstances that will arise in future may not be credible or effective in the medium term. “This is the reason India — and most credible polities around the world — do not constitutionalise the specifics of tax policy. The GST should be no different”.

Making a case for doing away with exemptions, the committee also said that tax policy cannot be overly burdened with achieving industrial, regional, and social policy goals and “more the exemptions, the higher will be the standard rate”.

The Constitution Amendment Bill, popularly known as the GST bill, is pending clearance in the Rajya Sabha and is expected to be tabled in the ongoing Winter Session. After passage from the Upper House, it needs to be ratified by 50 per cent of states. The government is though working towards completing the work by March 31 next year to enable GST’s roll out from April 1, 2016.

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