The central government is concerned that a higher GST rate could rob the country of the potential economic gains from the multi-point, destination-based tax.
The discord between the Centre and states over the contours of the Goods and Services Tax (GST) seems hard to be reconciled. The Centre, which has agreed to provide constitutionally-guaranteed GST compensation and keep petroleum products out of the proposed comprehensive indirect tax in the initial few years to address the states’ concerns, is peeved at their new demand that the combined GST rate should be above the revenue neutral rate (RNR) of 27% projected by a designated think tank for most transactions.
The central government is concerned that a higher GST rate could rob the country of the potential economic gains from the multi-point, destination-based tax. Stating that a steep GST rate could dent compliance, particularly at the retail level, a finance ministry official told FE that it could also be difficult to justify such a rate politically. “Low compliance level would hit revenue productivity and in turn prevent any lowering of the tax rates in future,” he said.
“GST implementation is supposed to bring down the indirect tax burden (on businesses). A rate above what is currently applied would defeat the very purpose of GST,” added the official
The National Institute of Public Finance and Policy’s recommendation of a 26.68% GST rate (RNR) is almost equal to the sum of the prevailing highest state VAT rate (14.5%) and median excise duty (12.5%). With the hike in service tax proposed in the recent budget to 14%, with the state VAT, the combined rate could be 1.5 percentage point higher than NIPFP’s RNR.
The weighted average VAT rate will be much lower (many merit goods attract 5-6% tax) and so would be the average excise incidence and so, the combined GST rate, also considering that it would capture larger base, could be much lower.
Officials from the centre and state governments held discussions on Thursday and Friday ahead of the meeting of the empowered committee of state finance ministers slated for May 7 and 8 to arrive at a consensus. Finance minister Arun Jaitley and state finance ministers are likely to meet on April 22.
The panel has not yet accepted the 27% RNR suggested by NIPFP and sought revised projections. Sources said the fresh estimate of RNR need not necessarily be lower than the initial projection considering that the base year and a host of assumptions are to be revised. The committee’s chairman and Kerala finance minister KM Mani had told FE last Friday that states were of the view that a GST 27% was ‘not sufficient’.
The Centre believes states’ concern for revenue loss from GST roll out is not realistic considering the fact that their demands for guaranteeing compensation for such losses has been incorporated in the Constitution (122nd) Amendment Bill itself. Also, as demanded by them, petroleum products would be temporarily kept out of GST in the initial years of the new regime, and liquor, until the Constitution is amended further.
Petroleum products account for 32.5% of the combined centre-state revenues (excluding corporate tax and dividend distribution tax levied by the Centre). Besides, exporting states are allowed to levy an extra 1% on inter-state sales. New Delhi believes these provisions would take care of states’ revenue loss fears.
Arriving at a unified tax rate applicable on goods as well as services, which would yield the same revenue to the Centre and states as at present, has been complicated by various states making random changes at their Value Added Tax rates and the point of taxation, said sources.
Rates for GST, which captures a much larger tax base, ideally ought to be significantly lower than current rates. The actual rate would be finalised by the proposed GST Council solely by consensus between central and state governments. The states had in 2010 opposed a much lower GST rate of 12% (7% for state GST and 5% for central GST) proposed by a task force associated with the 13th Finance Commission, calling it too low and impractical. The global average GST/VAT rate is 16.4%, while the average rate in Asia-Pacific is 9.88%. Canada and Nigeria have the lowest rate of 5%.
Source: Financial Express