Chances are that the tax incidence on the majority of items would come down once the goods and services tax (GST) is introduced, revenue secretary Hasmukh Adhia says, when asked about the inflationary potential of a standard GST rate above 20%. “If the exemption list and rate structure are properly designed, one can avoid having inflationary pressure,” he says, in an interview with FE. The official thinks that a decision on including petroleum and natural gas in the GST can be taken only after three years, by when the new tax will have stabilised.
Many experts point out that as currently envisaged (with significant exclusions like real property, petroleum, electricity, education, healthcare and the narrow band for states’ rate deviations), the GST won’t reduce the cascading of taxes much and might also fail to add significant value to the economy.
This is not true. Although the cascading effect in respect of petroleum products and electricity duty may remain, there will not be any cascading effect of excise duty on state VAT in the GST regime. Also, the simplification of the tax structure across the country will bring value to the economy.
There are examples in advanced economies and EMEs that a moderate GST rate and broad tax base are a potent combination that would boost compliance and thereby government revenue. Still, the government seems to be going by the views expressed by states, favouring a rate of 20-22% or even higher. Can’t we start with a standard rate as recommended by the chief economic adviser-led committee?
The rate and rate structure can only be based on facts and figures on the existing revenue of the Centre and states, which are to be discussed in the GST Council. At the moment, it is not possible to say yes or no to any such artificial number. The decision on rates will also depend on the list of exempt items, the list of demerit commodities, etc. Revenue is also important in the short run because we cannot have a situation of a sudden spike in the fiscal deficit, which can cause inflationary pressure.
While an 18-20% rate would have no/minimal impact on inflation, if the rate moves up to 22%, inflation could rise by up to 0.7%. Doesn’t this make a case for a rate below 20%?
The possibility of tax incidence on the majority of the items coming down is far greater compared with rates going up. Of course, the compliance of tax payment will improve. Whether or not GST will cause inflationary pressure is itself a moot question. If the exemption list and rate structure are properly designed, one can avoid having inflationary pressure but we need to watch inflation numbers after GST is implemented.
While the FM talks about the present tax incidence (Centre plus state) of 27-32%, this is with regard to goods only. The combined tax rate on services is lower. Also, the CEA committee on GST said the weighted average statutory rates for goods were 8.45% and 7.5%, respectively for the Centre and states in 2013-14. The rates might have moved up slightly since, but would still not add up to 27%.
It is a fact that 62% of the VAT revenue of the states and 85% of excise revenue of the Centre come from the standard rate. The standard rate for states is around 14.5% and that of excise duty of the Union is 12.5%. So on an average, 70% of the revenue comes from items on which the tax incidence is around 27% at present. We will have to match the number to see what an ideal rate structure, which is revenue-neutral, would be, while deciding the standard rate.
How soon will petroleum and natural gas, which are to be zero-rated initially, be brought into the GST ambit? Although the decision is that of the GST council, the Centre can take an initiative there.
The decision on including petroleum and natural gas in the GST can only be taken once the GST stabilises after the first three years. The states may not be comfortable surrendering their large part of income coming from petroleum and natural gas, without seeing the actual gains from the GST.
The Economic Survey had argued for removing countervailing duty exemptions, which are at present even higher than excise duty exemptions, resulting in negative protection for domestic industry. How would the GST address this?
We will have to review all the exemptions in the GST regime. I agree that there should not be any CVD exemption at all in items where local excise duty is applicable. This creates negative protection for domestic industry. This anomaly will go in the GST. The integrated GST will apply to all imports.
How confident are you of meeting the April 1, 2017 date for the GST? There are legislative, administrative and infrastructural issues to be tackled.
We are positive. In items relating to our domain of work, we are very confident that the same would be done in time. However, we cannot give guarantee for the time taken in the process of evolving consensus on various issues in the GST council.