Proposal by states committe could negate benefits of new tax
A panel set up by the state governments has proposed revenue-neutral rates (RNRs) for the central and state components of the proposed goods and services tax (GST) at 12.77% and 13.91%, respectively.
Analysts said these rates are nearly the same as — if not slightly higher than — the current rates of indirect taxes at the central and state levels. Ideally, the rates for GST, which captures a much larger tax base, ought to be significantly lower than current rates and bring concomitant additional competitive strength to the economy.
The states had in 2010 opposed a much lower GST rate of 12% (7% for state GST and 5% for central GST) proposed by a task force associated with the 13th Finance Commission, calling it too low and impractical. Some other agencies have since recommended relatively higher rates but most still lower than what the states’ panel has now suggested.
Of course, the task force assumed a much larger base of R31,25,325 crore at the then prevailing prices (given inclusion of most products including petroleum in the GST) while the states’ panel has assumed exclusion of petroleum from GST and took the values of 2011-12.
Globally, the average GST/VAT rate is around 16.4%. The average rate in Asia-Pacific is 9.88% and Canada and Nigeria have the lowest rate of 5%.
The proposed combined RNR of 26.68% for GST would mean that India won’t have any competitive advantage over most of its leading trading partners, sources said.
“The objectives of GST such as freer credit flow and removal of inefficiencies in the current system can be achieved only when the central and state GST rates taken together is less than the current central excise/service tax plus the highest VAT rate presently being levied across states,” said Bipin Sapra, partner at EY.
After a meeting of the empowered committee of state finance ministers here, its chairman and Jammu & Kashmir’s finance minister Abdul Rahim Rather said on Tuesday that states would give their views in writing on the RNRs suggested by the panel in a week.
“We have decided to refer this report to NIPFP (National Institute of Public Finance and Policy). These recommendations are based on the figures of 2011-12, the base year they have taken, which will have to be updated with the latest (2013-14) figures). After the empowered committee takes a final view on the RNR, it will be conveyed to the Centre. After the Centre and states reach a consensus on RNR rates, the proposed GST Council will ratify them.”
“Industry expected a wider tax base and a (combined) rate lower than 20% discussed earlier. At the proposed rates, although the increase may be marginal for goods that don’t enjoy concessional excise/VAT rates now, that would be rather steep for many merit goods,” said R Muralidharan, senior director at Deloitte.
Significantly, the states have said the the turnover threshold for entities to be covered under GST must be fixed at Rs 10 lakh instead of Rs 25 lakh proposed by the Centre. The idea also is to zero-rate the GST for petroleum products. This means that the states and Centre will continue to levy their separate taxes on these products while the value chains including these won’t be broken and deprive businesses of input tax credit, the key feature of GST.
“States have already said that petroleum, alcohol and tobacco should be excluded from GST. We are waiting for response from Centre,” Rather said. Meanwhile, the Centre is redrafting the GST Constitutional Amendment Bill (an earlier Bill lapsed with the dissolution of the previous Lok Sabha), as most issued have now been resolved with states. “We have not received the revised draft Bill yet,” Rather said.
Experts have long said that for GST to be a high-utility tax reform, it should have a very broad base, subsume most central and state taxes and levies and be extremely stingy about exemptions. The idea is to bring in a system that could militate against cascading of taxes in B2B transactions.