Recent developments on the goods and services tax (GST) front has opened up new possibilities for pushing forward with the GST legislation in the winter session of parliament scheduled to begin at the end of the month. The good news is that reports indicate that the Congress is willing to play ball and ensure the passage of the bill if the government is willing to meet them halfway.
However, unfortunately other unexpected developments threaten to further disrupt and prolong the legislative process in more ways than one. A new issue that has cropped up for the NDA government is the stepping down of the Kerala finance minister K M Mani from the chairmanship of the empowered group of state finance ministers on GST.
This means a new state finance minister has to be identified from outside the NDA to take over the chairmanship as per the tradition. Getting a competent and well versed non NDA state finance minister who will actively cooperate to push through the legislation at this late stage and protect interests of the states will be easier said than done.
Appointing a new chairman for the empowered committee of state chief ministers is not the only issue faced by the government. The more excruciating challenge is to find and fix a revenue neutral rate for the goods and services tax which will ensure that the states do not loose revenue while at the same time ensuring that the tax burden remain reasonable and does not push up retail prices and add to the already existing uncertainties on the inflation front.
This is a difficult challenge even in the best of time. But the situation has been made more complex in the current circumstances. One reason for this is that the Congress wants the NDA to have an 18% ceiling on the GST tax rate. Though the opposition is ready to climb down on the almost half a dozen demands they have put out earlier for the passage of the GST legislation they are adamant that three or four demands are non-negotiable including the need to fix a maximum rate.
Another reason that makes the calculation of the revenue neutral tax rates a difficult proposition is that different stakeholders have very disparate view on the level of the revenue neutral GST rate. The Thirteenth Finance Commission appointed by the UPA government in its reports years back has suggested a 12% GST rate with 5% being central GST and 7% being state GST.
However, the states have an entirely different view on the GST rate. The National Institute of Public Finance and Policy, a well-respected think tank in the national capital, has suggested a revenue neutral rate as high as 27% which has found support of the empowered committee of state finance ministers. They have justified the high rates by pointing out that the rate is arrived at after adding together the 12.5% excise tax rates and the 14.5% Vat that is now levied.
The select committee of the Rajya Sabha which looked into the issue recommended a broad base and a moderate tax rate with minimal number of variations and exemptions. The current GST legislation which exempts important revenue earning goods like alcohol, electricity, real estate and petroleum products from the ambit of GST makes calculation of revenue neutral rates more complicated.
And though a large number of countries have implemented GST there is very little evidence of a reasonable rate of GST as the numbers vary substantially across countries. Thus the VAT/GST rates in Singapore and Japan are at a low 3% while it is at a higher 6% in Malaysia, 10% in Australia, 16% in South Africa, 17% in China, 19% in Germany, 20% in France and 27% in Hungary.
However, one consolation for the government is that the panel headed by the chief economic advisor of the government of India to recommend the GST rates is expected to submit it report in a week or two. This will help the all stake holder to make a more informed decision which would not burden industry and the government by raising prices and adding to the inflation while at the same time ensuring that the states won’t lose out on the revenue front.