The government may have hinted at a more than 18 per cent rate for the proposed goods and services tax (GST), but the wrangle between the states and the Centre is only set to intensify with most states pushing for the highest possible rate of tax in view of potential revenue losses. If the current value added tax (VAT) rates across states is anything to go by, a possible move by the GST Council to peg the standard GST rate at around 18 per cent could translate into at least nine states potentially losing out revenues considering that their current standard VAT rate is over 14 per cent. This builds in the assumption that an 18 per cent standard GST rate could translate into a 9 per cent share for both the states and the Centre.
Some tax experts and government officials, however, said that the effective rate of taxation for VAT is around 4 percentage points lower than the existing standard VAT rate in each state owing to exemptions. Also, the loss due to a lower GST rate is likely to be compensated as the proposed GST enables states to tax services along with goods.
States with higher VAT rate, especially Gujarat, which takes the lead with the highest standard VAT rate of 15 per cent, are set to lose the most if GST rate is set lower. Five states such as Rajasthan, Chhattisgarh, Punjab, Karnataka and Jharkhand have a standard VAT rate of 14 per cent, while three state assemblies of Tamil Nadu, Andhra Pradesh and Puducherry have a standard VAT rate of 14.5 per cent.
Ten states including Kerala, Bihar, Assam, Odisha, Uttarakhand and West Bengal have a standard VAT rate of 13.5 per cent, while eight regions of Maharashtra, Delhi, Haryana, Goa, Arunachal Pradesh, Manipur, Sikkim and Tripura have a standard VAT rate of 12.5 per cent.
“The states with high VAT rates are set to lose if the GST rate is set around 18 per cent. Gujarat, Tamil Nadu and Maharashtra will be among the biggest losers as they have a high manufacturing base but low consumption. Also, goods are taxed at varying rates across states, which needs to be looked into. The total indirect tax rate for a product in a state such as Gujarat stands at 25-26 per cent (excise+VAT) as of now. States with high VAT rates and strong manufacturing base will be the biggest contenders for GST compensation, if Centre has to compensate states,” said Bipin Sapra, Tax Partner, EY.
Karnataka, Maharashtra, Andhra Pradesh, Gujarat, Tamil Nadu, Bihar, Odisha, Chhattisgarh, Delhi, Uttar Pradesh, Jharkhand, Rajasthan, Madhya Pradesh, West Bengal, Haryana and Puducherry account for almost 79 per cent of the VAT base in India.
“A state like Gujarat has the highest standard VAT rate as of now. If the standard GST rate is set at 18 per cent and assuming a 9 per cent rate for both states and Centre within that rate, states are unlikely to lose much as they will also get to tax services at the rate of 9 per cent. Also, the Central government has agreed to compensate states for next five years for potential revenue losses,” Santosh Dalvi, indirect tax partner of KPMG said.
In the present taxation structure, states have multiple rates, including the VAT along with additional taxes on inter-state trade such as octroi and entry tax. The standard VAT rate for goods in most of the states is about 12.5-15 per cent compared with the standard rate of 12.5 per cent at the Centre, taking the combined rate to a minimum of 25 per cent.
Last December, a panel headed by chief economic adviser Arvind Subramanian in its report had recommended a revenue neutral rate (RNR) of 15-15.5 per cent and standard rate of 16.9-18.9 per cent for the proposed GST but refrained from providing state-wise RNR calculations citing dependency of taxable base of states on rules for supply of goods and services in the new tax regime.
Though states failed to emerge at a consensus for the GST rate in the meeting of the Empowered Committee of State Finance Ministers last month, they have often cited potential revenue loss for demanding a higher GST rate and compensation. While several states have pegged different figures for their compensation demand, there is no official detailed calculation on the matter. At the Idea Exchange programme held by The Indian Express earlier this month, Subramanian said that currently no data exists for calculation of compensation structure for states vis-a-vis the rates. “I don’t think any state has done serious calculation. Of course the data doesn’t exist yet and we are going to be doing that,” he said. Revenue Secretary Hasmukh Adhia also had said earlier this month that the compensation for states will be decided after the rate is fixed by the GST Council.
In November 2014, National Institute of Public Finance and Policy (NIPFP) had estimated a standard rate of around 27 per cent, in November 2014, comprising of state GST of 13.91 per cent and central GST of 12.77, following which the empowered committee of state finance ministers had asked the NIPFP to rework the GST rate. Last year, finance minister Arun Jaitley had termed a standard GST rate of 27 per cent as very high.
In 2010, states had opposed a much lower GST rate of 12 per cent (7 per cent for SGST and 5 per cent for CGST) proposed by a task force associated with the 13th Finance Commission, calling it very low.
A revenue-neutral rate is a single rate at which there will be no revenue loss to the Centre and states in the GST regime, while the standard rate will be levied on most goods and all services. The proposed GST has exempted alcohol for human consumption, while other indirect taxes such as excise duty, service tax, value added tax, central sales tax will be subsumed. Petroleum and petroleum products are exempt as of now but shall be subject to the levy on a later date based on the recommendation of the GST Council.
The Constitution (122nd Amendment) Bill, after its ratification by Lok Sabha last week, has been sent to states. At least 16 out of 29 state assemblies need to pass the Bill with a simple majority, with the government expecting to complete this process within a month. After the ratification by states, the Bill will be sent to the President for his assent, following which a GST Council with representatives from the Centre and states will be formed within 60 days of the enactment of the Bill. The Council will be entrusted with recommending the tax rates, including the band of rates for goods and services.