Prelude to GST

Report of a key panel lays out the middle ground for resolving political differences.

Written by M. Govinda Rao | Published: December 9, 2015 12:12 am
Goods-and-services-GST-Re An important issue that the CEA-led committee could have perhaps considered is an additional levy of 1 per cent by the states, to be devolved to urban local bodies.

The report of the committee chaired by Chief Economic Advisor Arvind Subramanian on goods and services tax (GST) rates is another step towards passing the bill in Parliament. The committee has made sensible recommendations towards evolving a broad-based and simple GST with low rates. As such, the recommendations are very welcome. Most importantly, they provide a middle ground for negotiations and both Union and state governments should accept them and the opposition parties should support the passage of the bill pending in Parliament.

The committee should be complimented for making proposals that ensure that the basics of the destination-based GST are not compromised. In particular, the recommendation on the undesirability of levying a 1 per cent tax on interstate transactions is important because such a tax would go against the very grain of the GST. Keeping the general rate at 17-18 per cent shows the keenness to keep rates at a reasonable level. The recommendation that there should not be any tax-bands is also very important to ensure uniformity in rates. The committee is correct in suggesting that the rates should not be seeded into the constitutional amendment. They should be decided in the GST Council and there should be flexibility for the Union and states to change them as and when needed. Hopefully, as there was participation of different states in the committee, agreement on the proposed structure will not be difficult. The report also seems to suggest that the number of commodities and services exempted should be kept at a minimum. The recommendation to keep a lower bound of 6 per cent, instead of the prevailing 5 per cent, is also important because it helps to keep the general rate low and could eventually lead to convergence to a single rate.

It is, however, important to understand that this is only the first step in determining the rates and that there is a long way to go before the GST Council finally approves the rate structure. Both the Central Board of Excise and Customs and the Empowered Committee of State Finance Ministers will be closely scrutinising the estimates of the revenue-neutral rate as well as the structure of rates recommended by the CEA-led committee before a final decision is taken in the GST Council. The committee has arrived at the overall revenue-neutral rate of 15.5 per cent and a general rate of 17.5 to 18 per cent. The rate of tax will depend on various factors like the threshold levels for taxation, the list of goods and services exempted, those that are zero-rated or subject to a lower rate of tax, the rate leviable on demerit goods, and the assumptions about the improvement in tax compliance.

The prevailing threshold for the Central excise duty is Rs 1.5 crore whereas it is Rs 10 lakh for services. The states have lower but varying thresholds and so far, the Empowered Committee of State Finance Ministers has not arrived at a decision on this. It is also important to note that in the empowered committee, the states had opposed the lowering of the threshold for excise duty on the plea that small enterprises, which were paying only value added tax (VAT) in the past, would be excessively burdened as they would be subject to both Central GST as well as state GST. Similarly, the exemption list of excise duties is long, and some important services continue to be exempted despite being placed in the negative list in 2014. The list of exemptions under the VAT also needs to be pruned. If indeed the CEA-led committee has taken as given the present level of exemptions, there can be further scope for reduction in the general rate. Similarly, the rate could be further brought down if real estate transactions are brought within the ambit of the GST. In the absence of this, an ad hoc mechanism of crediting the tax paid on materials and services used in the construction industry (like works contracts) will have to be put in place. But this will complicate the tax system.

Ideally, it would have been appropriate to include tobacco, alcohol and petroleum products in the GST and levy a separate sumptuary excise on them like many other countries have done. It must be noted that over 35 per cent of Central excise and state VAT revenues are collected from motor spirit and high-speed diesel, and including them in the GST tax base will push up the general rates. However, a separate green tax on these could have covered the revenue angle. On alcohol and tobacco products, the demerit rate of 40 per cent, as suggested by the CEA-led panel, appears to be too low. At present, cigarettes are subject to tax by both the Union and state governments, and the cumulative rate is higher than 40 per cent. Perhaps there is scope for revisiting this when the issue is considered by the GST Council.

An important issue that the CEA-led committee could have perhaps considered is an additional levy of 1 per cent by the states, to be devolved to urban local bodies. With the implementation of the GST, levies like octroi, local body tax and entry tax will be subsumed and, therefore, this additional rate could provide much-needed resources to local bodies. In fact, when Gujarat abolished octroi, the VAT rate was revised by 1 per cent to compensate municipal

On the whole, this is an important report and should help in ironing out the differences between the ruling coalition and opposition parties. While there are many issues that will still have to be decided upon before implementing the GST reform, this is an important step. It is fondly hoped that all political parties will show the much-needed maturity to pass the bill in Parliament for the good of the country.

The writer, emeritus professor at the National Institute of Public Finance and Policy, Delhi, was a member of 14th Finance Commission.

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  1. K
    K SHESHU
    Dec 9, 2015 at 7:21 am
    GST is being imposed on common consumer goods. Tobacco and other harmful goods should have a higher tax rate. Luxurious items like cars should also attract higher taxation. Banning of alchohol should be considered but due to revenue loss, the governments are reluctant to look at that option. But, at least, they can be heavily taxed so that they will be out of poor peoples reach B
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    1. R
      Rishi Raj
      Dec 9, 2015 at 6:19 am
      A lot of hype has unnecessarily been created round GST. After all a tax is just a tax. Paying them is always painful and government then merrily squanders the money. The focus should be on the government expenditure. Government should run itself in an efficient and economical manner.
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      1. M
        MUMU
        Dec 9, 2015 at 6:55 am
        GST will not bring any good for the common people, they might even end up paying more rice, if the 18% rate is not capped, this is the ploy of BJP to milk common people. Yes, if the tax rate is reasonable around 17-18%, some business will be easier and Govt will get more money for spending on infra and social sectors. But if tax rate is not controlled as per suggestion of congress, it may be found to be disaster for the common people, of course rich peoples will be benefited as heir well-wisher as they donate for the party.
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        1. R
          rajani kant
          Dec 9, 2015 at 1:03 pm
          collection of tax by the exchequer on a reasonable scale is OK. But what about infrastructure development in a city like Chennai. Already the majority of arterial/interior roads of the city are patch work and after the recent calamity it is nothing but pots/mans road. Corruption as usual is rampant and lo! one more godsend opportunity to the powers-that-be who will suck even from the muck, in the name of rescue and relief and the plight of the commoners would bed as it is! 'sub kuch chalta hai' and jaise tthey'.
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