New Delhi: In a recommendation that can break the political logjam over GST, a panel headed by the chief economic advisor Friday suggested 17-18 percent GST rate and dropping of the one per cent additional tax on inter-state sales.
The Arvind Subramanian-headed panel, however, opposed inclusion of GST rate in the Constitution. The Congress has been demanding GST rate be included in the Constitution.
Describing GST as a historic opportunity to “Make in India by Making One India”, the panel has recommended a range for revenue-neutral rate (RNR) of 15-15.5 percent for the proposed Goods and Services Tax (GST), with a preference for the lower one.
It also suggested a range of ‘standard’ tax rate of 17-18 percent for bulk of goods and services while recommending 12 percent for ‘low rate goods’ and 40 percent for demerit goods like luxury car, aerated beverages, pan masala and tobacco. For precious metal, it recommended a range of 2-6 percent.
While Subramanian at the press meet said the recommended standard rate is 17-18 percent, an executive summary of the report released alongside suggested the rate to be between 16.9-18.9 percent in a tabular form. The summary in narration, however, put the rate at 17-18 percent.
‘Bringing alcohol and real estate within the scope of the GST would further the government’s objectives of improving governance and reducing black money generation without compromising on states’ fiscal autonomy,” said the report, which was submitted to Finance Minister Arun Jaitley today.
The recommendations seem to suggest a middle-path approach in the deadlock between the Congress and the government, which didn’t want the GST rate to be part of the Bill as it would require a two-third majority approval of Parliament for any change in rates for any product in future.
The government wants the GST Bill to be approved in the current session of Parliament to meet the April 1, 2016, rollout deadline.
“This historic opportunity of cleaning up the tax system is not just necessary in itself, but also to support GST rates that facilitate rather than burden compliance,” the report added.
Talking to reporters, Subramanian said once the GST is implemented the indirect tax regime in India would be the best in emerging market economies and high income countries.
He said it was a “historic opportunity to rationalise exemptions that account for Rs 3.2 lakh crore or 2.5 percent of the GDP.” The GST, which will create a uniform market, will cover 2-2.5 million tax entities.
Subramanian further said, the impact of implementation of GST on inflation is likely to be “minimal”, but there would be a need for monitoring.
Revenue Secretary Hasmukh Adhia said, “The government will study the report of the CEA-led committee on revenue neutral rate for GST and take a view on it.”
The final decision on rate, he said, “can only come from the policy choice that GST council makes for the rate structure and exemption limits”.
The Committee opined against providing a “band of rates” saying it complicates administration of the tax machinery.
“There are sound reasons not to provide for an administration-complicating band of rates, especially given the considerable flexibility and autonomy that states will preserve under the GST (including the ability to tax petroleum, alcohol, and other goods and services),” it said.
The report suggested that evaluation of GST implementation should not be taken over short-term period, but over longer period of time like 1-2 years.
It said elimination of any taxes on inter-state movement of goods would help promote Make in India and ease of doing business.
The report said facilitation of tax payer compliance and easy administration in early stages of roll out would help realising the benefits of GST and added that the aim should be to strive towards one-rate structure in the medium term.
Giving rationale for non-inclusion of GST rate in the Constitution, the report said, “setting a tax rate or an exemptions policy in stone for all time, regardless of the circumstances that will arise in future, of the macroeconomic conditions and of national priorities may not be credible or effective in the medium term”.
Observing that the current tax structure has become an ‘exemptions raj’, the CEA report said the number of cess should be reduced.
“Tax policy cannot be overly burdened with achieving industrial, regional, and social policy goals; and more targeted instruments should be found to meet such goals, for example, easing the costs of doing business, public investment and direct benefit transfers, respectively. Besides, cesses should be reduced and sparingly used,” the report said.
It further said that rationalisation of exemptions under the GST will complement a similar effort already announced for corporate taxes, making for a much cleaner overall tax system.
As regards the taxation of precious metals, it said the choice that the GST council would make would be critical. “The more exemptions that are retained, the higher would be the standard rate”.
The GST Council, the report said, would determine how the standard rate would be divided between the Centre and states. Giving an example, it said that a standard rate of 17 percent would lead to rates at the Centre and states of 8 percent and 9 percent, respectively.
Asked if the government will start fresh talks with the Congress, Minister of State for Finance Jayant 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.”
The panel analysed three different methods to calculate the crucial revenue-neutral rate — the rate at which there will be no loss to states and central government.
“This was a technical exercise and we took into account methods using direct taxes, indirect taxes and an approach suggested by NIPFP,” he said. The NIPFP report suggested RNR at 17.7 percent.
The panel excluded real estate, electricity and alcohol and petroleum products while calculating the tax rate as some states have expressed reservations against giving up tax control on the lucrative items, but the CEA panel suggested these be brought under the GST ambit soon.
“The submission of the report by CEA is one more step in the direction of our administrative preparedness for implementing GST in the country,” Economic Affairs Secretary Shaktikanta Das said.