BackGST sub-panel backs revenue-neutral rate of almost 27%
States continue to hold out; analysts warn that high rate is neither politically nor economically feasible
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New Delhi: The centre and the states moved into the last mile of discussions ahead of agreeing on a single goods and services tax (GST) after a panel proposed to peg the rate at just under 27%.
This is roughly the aggregate of centre and states’ indirect tax rates that prevail currently. The difference is that this rate will not be cascading.
There is considerable uncertainty on whether the states and the centre can strike consensus on this rate.
Not only is this rate based on relatively older revenue collections, states are rejecting the centre’s proposal to include petroleum products in the common pool.
India hopes to implement GST from 1 April 2016.
The proposed nationwide GST is intended to usher in a uniform market for goods and services, cut business costs and boost government revenue. The indirect tax would replace existing levies such as excise duty, service tax and value-added tax (VAT).
The government is proposing to introduce the constitutional amendment Bill and push for its passage in the winter session of Parliament, but may have an uphill task getting states on board, given their reluctance to agree to a GST design that they feel could lead to revenue losses.
A sub-committee comprising central and state government officials has recommended a revenue-neutral rate (RNR)—a rate at which where will be no revenue loss to the states after the adoption of GST—of almost 27% under the proposed GST regime.
While the state GST (SGST) component is proposed to be 13.91%, the central GST component is proposed at 12.77%. The committee has also proposed a narrow band for the SGST component.
However, officials were quick to caution that this rate is a work in progress, mainly due to two reasons. One, the rate has been arrived at based on the revenue collection figures of 2011-12 and needs to be updated as per the latest figures available, and two, states continue to oppose inclusion of petroleum under GST in the constitution amendment Bill.
“The sub-committee has submitted its report. But the empowered committee is yet to take a call on this. We have asked NIPFP (National Institute of Public Finance and Policy) to rework the numbers based on revenue collection figures of 2013-2014," said Abdul Rahim Rather, chairman of the empowered committee of state finance ministers and the finance minister of Jammu and Kashmir, after the meeting on Tuesday.
Satya Poddar, partner, tax and regulatory (policy advisory), at EY, said the high tax rate is an indication of the flawed design of GST.
“The combined rate of almost 27% is not politically or economically feasible. No country has applied such a high GST rate and consumers will not accept it. The highest is 25% in some Scandinavian countries like Denmark and Sweden where there is very high degree of compliance and enforcement system," he said.
“The government should look to broaden the tax base and lower the tax rate. If items like land, liquor and petroleum are included under GST, then there can be at least a 5% reduction in RNR," he said.
Though Union finance minister Arun Jaitley has said that the centre is very close to forging a consensus with states on some of the contentious clauses in the constitution amendment Bill essential for the rollout of GST, states continue to hold out.
“There is no change in our position. We had sent the empowered committee’s views to the finance ministry after our meeting in Shillong where we had opposed the inclusion of petroleum in GST under the constitution amendment Bill," Rather said, adding that the government has not sent the revised draft of the constitution amendment Bill to the empowered committee for discussion.
Rather said the states have made it clear to the centre that while preparing the draft GST Bill, the views of the states should be respected.
“I have made it abundantly clear to the government of India because that will be in the true spirit of cooperative federalism. States should be carried along. If all goes well, the constitutional amendment Bill is carried in Parliament by both the Houses, I think the 2016 target rollout date is achievable," he said.
To address states’ concerns, the centre was proposing to include petroleum under GST in the constitution amendment Bill but not levy GST on it. In an interview with Mint last week, Jaitley had said that the central government is in touch with chief ministers of states as it tries to address states’ concerns before the winter session.
With the finance minister promising states that the centre will address their concerns over central sales tax compensation and looking to make a provision in the first supplementary demand of grants, the government has managed to assuage states to an extent about their demand for compensation. But states still want a constitution mechanism to address compensation concerns once GST is implemented.
The states have also stuck to their stand that the revenue threshold limit beyond which GST will be levied should be ₹ 10 lakh for general category states and ₹ 5 lakh for special category states and north-eastern states, despite the central government asking states to review its earlier decision on this limit and increase it upwards to ₹ 25 lakh.
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