The GST Council’s decision to keep the tax rate on items of mass consumption at 5 per cent will bring down prices and soften inflation, Chief Economic Adviser Arvind Subramanian said on Thursday. At its meeting headed by finance minister Arun Jaitley and attended by state finance ministers, the Council agreed on a 4-tier Goods and Services Tax (GST) rate structure — 5, 12, 18 and 28 per cent.
It decided that items of mass consumption be taxed at 5 per cent as against the Centre’s proposal of 6 per cent. The modified proposal, “should bring prices down. I don’t think there is any fear on inflation because 6 per cent goes to 5 per cent. A few products move from 26 to 28 per cent but many go from 26 per cent to 18 per cent,” said Subramanian, according to a PTI report.
“On average this should probably serve to lower inflation. If at all, the impact on inflation will be very small. Today’s change should probably bring it down,” he said.
To safeguard the interest of poor and keeping inflation under check, half the items in CPI basket like foodgrains would not be taxed at all, while luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, will be taxed at the highest rate of 28 per cent and would also attract a cess.
Meanwhile, commenting on the benefits of GST, finance secretary Ashok Lavasa said, “Now, you have a system by which additional burden of compensating the states is not being passed to consumers in a way it would have otherwise passed on in terms of taxes. So, this is very reasonable arrangement that has been agreed to keeping in view the interest of consumer and state governments.”
It also enables the Central government to set apart a fund by which states will be compensated, he was quoted by PTI as saying.
About Rs 50,000 crore will be needed to compensate states for loss of revenue from rollout of GST, which is to subsume a host of Central and state taxes like excise duty, service tax and VAT, in the first year beginning April 1.
The base year for calculating the revenue of a state will be 2015-16 and secular growth rate of 14 per cent will be taken for calculating the likely revenue of each state in the first five years of implementation of GST. States getting lower revenue than this will be compensated by the Centre.