Panel backs scrapping proposal of a 1% additional levy by states on the cross-border transport of goods
A panel under chief economic adviser Arvind Subramanian, constituted by the government to decide on goods and services tax (GST) rates, has recommended a revenue-neutral rate of 15-15.5%, with a standard rate of 17-18% which will be levied on most goods and all services.
A revenue-neutral rate is a single rate at which there will be no revenue loss to the centre and states in the GST regime.
The panel has recommended a three-tier rate structure wherein some essential goods will be taxed at a lower rate of 12%; so-called demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products at a higher rate of 40%; and all remaining goods at a standard rate of 17-18%.
All services are proposed to be taxed at the standard rate of 17-18%.
The committee has recommended doing away with the additional 1% tax to be levied on supply of goods over and above GST.
It has also recommended broadening the GST base by including petroleum, electricity and real estate.
The rates proposed by the Subramanian panel are much lower than the 27% rate initially arrived at by the National Institute of Public Finance and Policy (NIPFP), working at the behest of the centre and the states. The government said the rate was too high.
Subsequently, last month, NIPFP submitted its revised calculations. The report said that the standard rate could be in the range of 23-25% if goods are taxed at three different rates—a special rate for precious metals, a lower merit rate for some important goods as well as a standard rate that will be applicable to most goods.
It had also suggested a GST rate of 18-19% in case of a single GST rate—that is all goods are taxed at the same rate.
GST is expected to remove barriers across states and integrate the country into a common market, reducing business costs and boosting government revenue. The indirect tax would replace existing levies such as excise duty, service tax and value-added tax.
A low GST rate is considered key for the successful implementation of the indirect tax regime as a high rate will not only be politically unacceptable, it will also encourage tax evasion as many small traders may prefer to stay out of the tax net.
A moderate rate will be politically more acceptable than a revenue-neutral rate.
The government had set up the committee under Subramanian in June to arrive at GST rates by factoring in the economic growth rate, tax compliance levels and taxpayer base.
To be sure, the final rate will be decided by the GST Council, a representative body made up of the Union finance minister and finance ministers of all the states.
However, this GST Council can only be constituted after the Constitution amendment bill is passed by Parliament. This bill, needed for implementation of GST, is currently awaiting legislative passage in the Rajya Sabha.
Though the government will miss the April 2016 implementation deadline for GST, it is hopeful of implementing this reform in 2016-17 itself.