While finance ministers of states had initially said there should be “significant reduction” in the rate, the standard rate could finally be as high as 20-22%, said a minister.
During discussions last week, it emerged that some states levy 27-28% tax, including VAT and other levies such as entry tax. “In this scenario, the standard rate should be 22-23%,” the finance minister of a northern state said.
Kerala FM Thomas Isaac had advocated a rate of 22-24% during the meeting of the empowered committee of state FMs on July 25. Isaac had even opposed the Congress demand to cap the overall GST rate at 18%, said sources.
Although Isaac admitted that GST+ would be a burden on people, he argued that it would neutralise revenue loss for the Centre and the states.
The panel headed by Subramanian had pegged the revenue neutral rate at 15-15.5% and the standard rate at 17-19%. A standard rate “higher than 18-19% will stoke inflation”, the government’s chief economist said on Thursday . The states’ tough stance on GST rate comes at a time when the Congress is strongly advocating an 18% ceiling, arguing that anything higher would be inflationary and impact the common man.
Already , there are fears of a higher rate pushing up the cost of services -from restaurants to mobile bills and insurance premium -which are currently taxed at 15%, including Swachh Bharat and Krishi Kalyan cesses.
“At 27% it is totally self-defeating… up to 18-19% there will be minimal impact on inflation and if it goes to 22% there will be a few basis points increase,” he said.
Subramanian also warned that an increase in rate by a percentage point reduced compliance by the same margin. There is an argument that states will need higher revenue to meet their development spending. While the Centre has assured full compensation for five years for any revenue loss, a high bill will also restrict its ability to spend on health, education and other crucial schemes unless it is willing to borrow more and increase the fiscal deficit.
The states’ argument is also seen as a bargaining chip for assured compensation from the Centre.
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