GST: Subramanian panel bats for fewer exemptions

The committee favours removing exemptions granted to education, health (excluding medicines) and power

Keeping exemptions to a minimum under the goods and services tax (GST) will be key to keeping tax rates low and checking the inflationary impact of the proposed new indirect taxation regime, a panel headed by chief economic adviser Arvind Subramanian has said.
The panel also batted for a high revenue threshold of Rs.40 lakh to exclude small traders from the GST’s net.
It also pointed out that while a standard rate of 18% will not have any impact on inflation, a higher rate of 22% will increase inflation by up to 0.7%.
Highlighting the advantages of GST, the panel also said the government’s anti-black money initiative can be complemented by GST, especially if it is extended to as many goods and services as possible, especially alcohol, real estate and precious metals.
In its detailed report released on Wednesday on the revenue-neutral rate under GST, the panel favoured keeping exemptions to a minimum, pointing out that India loses revenue equivalent to around 2.7% of gross domestic product on account of exemptions.
GST is expected to unite the country into a common market by removing tax barriers across states. Because of the strong credit chain, it will also create an audit trail that will help check tax evasion and the generation of black money.
The Subramanian panel suggested that exemptions be restricted to a few “merit goods” that feature prominently in the consumption basket of the poor such as food items, especially cereals, pulses, edible oils, vegetables and fuel.
It also said exemptions should also be confined to finished goods because taxes on intermediates are in any case reclaimable as input credits.
The panel also favoured removing exemptions granted to education, health (excluding medicines) and electricity. It also favoured including alcohol under GST.
It favoured taxing precious metals like gold and silver at the standard rate of 17-18%, arguing that they are consumed by the rich, rather than the low concessional rate of 1-1.5% at which these items are taxed at present. Still, it conceded that they are unlikely to be taxed at such high rates.
“It is inconsistent for the government to actively promote schemes (gold bonds and gold monetization) to wean consumers away from gold, on the one hand, and also give highly concessional tax rates to buy gold, on the other. For all these reasons, these commodities should, in principle, be taxed at the standard rate: instead, they are taxed at about 1-1.6% (centre plus states). This anomalous treatment must be rectified at least by raising current tax levels to 4% or 6%,” the report said.
It also favoured adopting the states’ list for exemptions to bring down the overall exemptions to less than 100.
The centre and the states have agreed to bring down the exemptions to less than 100 items. At present, while the centre has more than 300 exempted items, states exempt around 99 items. It has been agreed that the states’ exemption list will be followed in GST, Mint reported on 17 September.
(mintne.ws/1NyGrrD)
The panel acknowledged that keeping GST rates low is also important given the “perception issue”, especially when it comes to taxing services.
“Today’s GST rate is 14.36% for services (now nearly 15% with the Swacch Bharat cess),” the report pointed out, adding that a 20-22% tax rate will make the GST seem like a substantial tax increase.
“A lower rate will be seen as more politically acceptable and will help taxpayer compliance,” it said.
Last week, the panel proposed a four-tier rate structure wherein some essential items will be taxed at 12%, gold and precious metals at 2-6%, some so-called sin or demerit goods like luxury cars and tobacco products at 40% and most goods and all services at 17-18%.
These rates were derived from a revenue-neutral rate of 15%. A revenue-neutral rate is a single tax rate wherein there will be no revenue losses to states and the centre from transition to GST.
On thresholds, the panel pointed out that to minimize the burden on small taxpayers, higher thresholds are needed.
“The current proposal is to have a common threshold of Rs.25 lakh for goods and services combined, but raising this threshold say up to Rs.40 lakh may be considered,” the report said.