Dual GST Rate Regime Could Fast-Track Political Consensus

Arvind Subramaniam’s recommendation of a dual rate of GST will start fresh negotiations with the Congress.

A committee chaired by chief economic adviser Arvind Subramanian has recommended a dual rate of goods and services tax (GST) with17-18 per cent as the standard rate and removal of the additional one per cent tax on inter-state sales of manufactured goods, setting the ground for a fresh round of negotiations with the Congress party on the tax reform bill that’s stuck in the Rajya Sabha.

The committee has said the revenue neutral rate for GST is 15-15.5 per cent and that’s far lower than the 27 per cent suggested by the National Institute for Public Finance and Policy (NIPFP) earlier. A revenue neutral rate is the single rate which, if applied to all goods and services, will preserve the revenues of the Centre and state at the prevailing level when the shift to GST is made.

The panel has also suggested 2-6 per cent tax on precious metals, 40 per cent on demerit goods such as luxury cars, aerated beverages, paan masala and tobacco, and a concessional rate of 12 per cent for essential goods that are commonly consumed. There could also be a small list of items that are exempt from the tax, much like what is the case under the current state value added tax system and central excise duty.

Inspired by the 13th Finance Commission

These recommendations are to be studied by the finance ministry and also circulated to the states for their views over the next few days. In all likelihood, most of these suggestions would find favour with the finance ministry. It is also broadly in line with what the states want – states have always been against a single rate suggested by a task force appointed by the Thirteenth Finance Commission.

The states had argued before the Thirteenth Finance Commission that a single rate would be regressive as it would increase taxes on everyday consumption and provide relief to the higher taxed luxury goods. It may be recalled that the task force of the Thirteenth Finance Commission in 2009 had suggested 11 per cent as a revenue neutral rate if a flawless GST was implemented.

It had further suggested a GST rate of 5 per cent at the central level and 7 per cent at the state level, the combined rate being 1 per cent higher than the revenue neutral rate. For precious metals, the task force had suggested that the Centre and states each levy 1 per cent tax. On demerit goods such as petroleum products, tobacco, alcohol, it has suggested dual levy of GST and excise duty.

Recommendations on GST

• A combined central and state tax on most goods and all services to be taxed at 17-18 per cent.
  
• Some select goods could be taxed at lower levels.
  
• Higher tax (40 per cent) suggested for aerated drinks, luxury cars and tobacco.
  
• Panel said states and centre could agree to exempt some goods from GST.
  
• Scrap the additional 1 per cent tax on manufacturing states.

Mixed Bag for the Congress

It may be recalled that the Congress party had demanded that the GST should be set at 18 per cent and that it should be written into the Constitution. It had said the 1 per cent additional tax on inter-state sale of goods should be dropped from the Constitution Amendment Bill if the government wanted its support for the tax reform. The 1 per cent additional tax had been included in the Constitutional Amendment Bill on the insistence of states such as Gujarat.

The committee’s recommendation of 17-18 per cent standard rate for most goods and all services thus betters the Congress’ demand. However, the committee has rightly not favoured the rate being written into the Constitution. The recommendation of the committee to scrap the 1 per cent additional tax should soften Congress’ stand on the GST bill.

Significantly, the CEA has been opposed to the 1 per cent tax from the beginning, because it is not only against the spirit of GST, which is a destination-based tax on consumption but also because it can have severe cascading effects with the 1 per cent tax translating into as high as 5-7 per cent tax depending on how many borders goods travel from the factory in one state to the consumer in another state.

The Congress party too shared the view. The 1 per cent tax is an origin-based tax, and industry and tax professionals see it akin to the central sales tax (CST) on inter-state sale of goods - the CST is meant to be scrapped when GST is implemented.

Politics Behind GST

• GST Bill cleared by the Lok Sabha in the Budget Session of Parliament.
  
• Congress objected to the Bill as it differed slightly from their version.
  
• Congress demanded five changes to the Bill before its clearance in the Rajya Sabha.
  
• New parliament committee has made adjustments to the bill based on Congress’ demand.
  

Cheaper Goods and Expensive Services

The rate structure of the committee if implemented by the Centre and the states will mean most goods can become cheaper - assuming businesses will pass on the benefit of lower taxes to consumers. Currently, goods are taxed at 12.5 per cent central excise duty and 12.5-14.5 per cent state value added tax.

The committee has recommended that the Centre and states together levy 17-18 per cent GST, and has left it to the empowered committee of state finance ministers on GST to decide split of the rates between Centre and states.

In contrast, services are set to become a little more expensive. Service tax is currently levied only by the Centre and at a rate of 14 per cent. The government had imposed a Swacch Bharat cess of 0.5 per cent on services effective from November 15. Once GST is implemented, services will be taxed by both the Centre and the states together at 17-18 per cent, if the Subramanian committee recommendations are accepted.

Now for Building Consensus

While the committee recommendations would be broadly acceptable, the challenge would be to keep the exempt list small and the rates on precious metal on the higher side. That would be essential to keep the standard rate at 17-18 per cent. If however, the states were to insist on a long list of exempted goods and also lower rates on precious metals, it would not be possible to maintain the standard rate at 17-18 per cent.

Prime Minister Narendra Modi and Finance Minister Arun Jaitley would also need to convince states, especially the BJP-ruled ones like Gujarat, to drop their demand for the 1 per cent tax. Manufacturing states such as Maharashtra and Tamil Nadu along with Gujarat need to be convinced that all losses in revenue caused by migrating from the current system of taxation to GST will be compensated by the Centre.

The Congress too should meet the government halfway on its demand if the Constitution Amendment Bill has to be cleared in the Rajya Sabha in the current winter session.

The writer is a Delhi-based senior journalist.