The proposed rate of GST should be in the vicinity of 15%—7% for central GST and 8% for state GST
It is extremely encouraging to learn from AR Rather, the chairman of the Empowered Committee of State Finance Ministers, that the GST could be levied by April 2016. In this context, the recent estimation of a 27% revenue-neutral-rate (RNR) for GST—12.77% for the Central-GST (CGST) and 13.91% for the state-GST (SGST), with a narrow band for SGST—by a sub-committee comprising central and state government officials may, however, reduce the gains from the GST.
Although it is said to be a work-in-progress, the estimation of the RNR has been firstly based on the principle of exclusion of petroleum from GST and, secondly, the database used for the estimation is the revenue collection figure of 2011-12. The database needs to be updated as per the latest figures available. The Empowered Committee has, therefore, not yet taken a call on this. The chairman of the Empowered Committee said, after a meeting last week, that the numbers would be reworked based on the revenue collection figures of 2013-14.
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Whatever may be the new numbers, it signifies two important points. First, it suggests that there is some mix up between the RNR and the recommended rate for GST. Second, if it is a recommended rate for GST, then it is an indication of a flawed design of the GST.
Regarding the RNR, it is important to keep in mind that the loss due to abolition of CST should be separately looked into as the impact varies amongst different states. Also, the existence of purchase tax, entry tax and other related taxes will have an impact on the RNR. Hence, the loss of revenue to different states would also vary. Further, the loss of revenue would depend upon the methodology being followed to estimate the revenue. While there are different methods for estimating revenue, three approaches could possibly be used—revenue approach, turnover approach and the consumption approach for the estimation of potential revenue. Hence, the estimation of the RNR is not just an issue of reworking numbers based on the latest revenue collection figures, but also relates to the finer details of methodology used to estimate the revenue.
Irrespective of whether the new exercise is done taking into account the new revenue collection figures or the related details of methodology, it should be clear to us that this is the RNR (a rate at which there would be no revenue loss due to GST), and it should not be the recommended rate for GST. Such a rate for GST is neither politically nor economically tenable.
A study of the VAT rates around the world suggests that the highest rate of VAT is 25% in some of the Scandinavian countries such as Denmark and Sweden and there exists a high degree of compliance and enforcement of VAT. In the Indian context, such a high rate of GST at the retail level will pose problems in administration of the tax. Today, only the State-VAT rate is visible but when the total of both GSTs at a very high rate is put at the retail level it would have a considerable impact on evasion.
Therefore, the broad contours of the GST design should be such that there is one standard rate, and two other rates (one low rate and another high rate) on necessities and demerit goods, respectively. It is not feasible to keep a single rate in a large country such as India where a huge majority of people live below the poverty line. Also, it may not be politically plausible to have a very high rate on necessities. It is, therefore, necessary that the Empowered Committee does some rethinking on the rate structure of the proposed GST.
It is suggested that the proposed rate of GST should preferably be in the vicinity of 15%—of which a 7% rate is levied by the CGST and 8% by the SGST. This could be accomplished by readjusting the base of both the components of GST, given the fact that approximately 40% of the revenue of CenVAT and state-VAT (accruing from petroleum products) is not under VAT. The exclusion of petroleum crude and its products from GST is based on the premise of raising larger resources through cascade-type taxes. This would, in fact, cause higher incidence of tax on inputs including capital goods and would ultimately affect the efficiency of the overall petroleum sector. It is, therefore, suggested that the overall petroleum sector should be brought under the GST regime with additional levy of excise and sales tax, if necessary, for raising more revenue.
In addition, the Centre and the states could levy sumptuary excises or surcharge on a few select commodities. This will ensure the additional mobilisation required to have a lower rate of GST.
Mahesh C Purohit
The author is director, Foundation for Public Economics and Policy Research, New Delhi