The passage of the Constitution Amendment Bill to introduce a country-wide goods and services tax (GST) in the Lok Sabha on Wednesday has now shifted the focus on the tax rate and its implication on overall prices and revenues for states.
Under the new system, the states and the Centre will collect identical rates of taxes on goods and services. For instance, if 16% is the GST rate on a good across the country, the states and the Centre will get 8% each, called the CGST and SGST rates.
Finance minister Arun Jaitley has said the new rate will be much lower than 27%, the rate states are believed to have been pushing for.
“I straightaway concede that 27% would be very high… after this 27% (revenue neutral rate) was born, the states and the Centre have decided to keep alcohol out,” he said in a reply to a debate on the GST Bill in the Lok Sabha.
The government has commissioned Delhi-based think-tank National Institute of Public Finance and Policy to work out the GST rates, which will not bring down either the states’ or Centre’s existing revenue levels.
Revenue-neutral rates, as these are called in technical parlance, have been a bone of contention between the states and the Centre, with the state governments pressing for higher rates as a hedge against lower tax earnings after migrating to GST.
The Bill has not specified the rate, which will be decided by a GST council headed by the central finance minister with state finance minister as members.
The 13th Finance Commission had suggested 18% as a possible figure.
The GST rate will be a key determinant on which way prices move after the introduction of GST, billed as India’s biggest ever tax reform initiative.
“We have decided to keep petroleum out and every state finance minister is not interested in imposing higher taxes on its own people, and neither the central government,” Jaitley said.
The impact of GST on prices is unknown, although in some countries such as Australia, the first few years after rolling out a uniform GST led to higher inflation.
In India, the 13th Finance Commission estimates prices of agricultural goods will increase by 0.61-1.18%, while prices of manufactured items would fall by 1.22-2.53 %.
Jaitley said since the aim behind this tax reform is to ensure seamless and uniform indirect tax regime besides lowering inflation, a 27% GST rate “is going to be too high and therefore the cost and prices itself will go up”.
“I do not foresee any state incurring a loss and the Constitution Amendment Bill provides that they would be compensated for five years,” Jaitley said.