With the Rajya Sabha clearing the Constitution (122nd Amendment) Bill, 2014, for introduction of the goods and services tax on Wednesday, a key task for the proposed GST Council will be determining the rate of taxation. A decision on the tax rate will have to be ratified by a three-fourth majority of the Centre and the states. As per the proposed legislation, the Centre will have one-third weightage on its vote and states will have two-third weightage.
While the Congress party relented from its earlier demand of capping the combined GST rate at 18 per cent in the Constitution Amendment Bill, analysts and experts believe a revenue-neutral-rate (RNR) in the range of 18-20 per cent could largely reduce the incidence of tax. Tax incidence on services is expected to rise whereas goods may attract lower taxation post implementation of the GST.
During the debate on the Bill in Rajya Sabha on Wednesday, Members of Parliament from most states appeared inclined towards a GST rate of 18 per cent, provided the Centre assured them that their present level of tax collections will be protected.
Former finance minister P Chidambaram said in Rajya Sabha that if government is not putting the 18 per cent cap on tax rate in the Constitution Bill, it must mention it when three months later it brings the GST Bill in Parliament. “We will campaign that it should not exceed 18 per cent,” he said. “The heart of this Bill is the rate of tax” and that should be kept low, Chidambaram said.
In its report submitted to the government last December, a panel headed by Chief Economic Adviser Arvind Subramanian had recommended a revenue-neutral rate (RNR) of GST of 15-15.5 per cent, with a standard rate of 17-18 per cent that is to be levied on most goods and all services.
The RNR is the rate at which there will be no revenue loss to the Centre and states in the GST regime. The RNR prescribed by the Subramanian panel is much lower than the 18 per cent demanded by the Opposition. The panel had also backed the scrapping of a proposal of a 1 per cent additional levy by states on the cross-border transport of goods, a move that was vehemently opposed by the Congress party and accepted by the government.
GST is aimed at creating a common national market in the country by eliminating a plethora of taxes imposed by the
Centre and state on movement of goods and services in the country. The committee had also recommended a 2-6 per cent rate for precious metals, a low rate of 12 per cent for mass consumption goods and a high demerit rate of 40 per cent on luxury goods and tobacco.
“These (indirect) taxes in aggregate constitute typically 25 per cent to 40 per cent of the price of products with certain categories being taxed at lower rates. There could be a reduction of tax incidence for several product categories if the standard GST rate is notified in the range of 18 per cent to 20 per cent,” said Rajeev Dimri, leader, Indirect Tax at BMR & Associates LLP.
While goods currently attract an effective tax rate of 24-25 per cent (including both the central and state levies), services attract a levy of 15 per cent. “Headline tax rate on services is likely to increase as these are currently taxed at 15 per cent even though expansion of the input credit base should partially offset the increase,” Dimri said. Subramanian had said in its report that the GST regime will replace the current tax structure which is highly complex and highly leaky.