CA Bimal Jain

CA Bimal JainBracing to roll out the new Indirect tax regime — Goods and Services Tax (“GST”) from April 1, 2016, the Central Government on June 17, 2015 announced the setting up of two Committees to suggest tax GST rates and to look into IT preparedness for GST.

The Government has entrusted Chief Economic Advisor, Dr. Arvind Subramanian—head of one of the two panels—with the task of proposing a Revenue Neutral Rate (“RNR”), or a rate at which there will be no revenue loss to States under the proposed GST regime.

Earlier, a rate of 27% recommended by a sub-committee of the State and Central Government officials, based on a report of the National Institute of Public Finance and Policy (“NIPFP”), was considered unacceptable and too high by the Government.

The Committee headed by the Chief Economic Adviser Dr. Arvind Subramanian (“the Committee”) on Possible Tax rates under GST submitted its Report to the Finance Minister yesterday, recommending a RNR range of 17-18 % for the proposed GST. At the outset, the Committee clarifies the terminology ‘RNR’ as under:

The term revenue neutral rate (RNR) will refer to that single rate, which preserves revenue at desired (current) levels. In practice, there will be a structure of rates, but for the sake of analytical clarity and precision it is appropriate to think of the RNR as a single rate. It is a given single rate that gets converted into a whole rate structure, depending on policy choices about exemptions, what commodities to charge at a lower rate (if at all), and what to charge at a very high rate…”

Because the prerogative of deciding the precise numbers will be that of the future GST Council, the Committee has chosen to recommend a range for the RNR rather than a specific rate. For the same reason, the Committee has decided to recommend not one but a few conditional rate structures that depend on policy choices made on exemptions, and the taxation of certain commodities such as precious metals.

The summary of recommended options is provided in the table below:

Summary of Recommended Rate Options (in %)
RNR Rate on precious metals “Low” rate (goods) “Standard” rate (goods and services) “High/Demerit” rate or Non-GST excise (goods)
Preferred 15 6 12 16.9 40
4 17.3
2 17.7
Alternative 15.5 6 12 18.0 40
4 18.4
2 18.9

*The Committee’s recommendations on rates summarized in the table above are all national rates, comprising the sum of Central and State GST rates. How these combined rates are allocated between the Center and States will be determined by the GST Council, which must reflect the revenue requirements of the Centre and States so that revenues are protected.

Following are the summarised highlights of the Executive Summary of the Report submitted by the Committee:

  • On the RNR, the Committee’s view is that, the range should be between 15% and 15.5% (Centre and States combined) but with a preference for the lower end of that range based on the analysis in this report;
  • On structure, in line with growing international practice and with a view to facilitating compliance and administration, India should strive toward a one-rate structure as the medium-term goal;
  • Meanwhile, the Committee recommends a two-rate structure. In order to ensure that the standard rate is kept close to the RNR, the maximum possible tax base should be taxed at the standard rate. The Committee recommends that lower rates be kept around 12% (Centre plus States) with standard rates varying between 17 and 18%;
  • The Committee recommends that this sin/demerit rate be fixed at about 40% (Centre plus States) and apply to luxury cars, aerated beverages, paan masala, and tobacco & tobacco products (for the States).
  • Choices that the GST Council makes regarding exemptions/low taxation (for example, on gold and precious metals, and area-based exemptions) will be critical. The more the exemptions that are retained, the higher will be the standard rate;

As the table shows, very low rates on precious metals would lead to a high standard rate closer to 20%, distorting the economy and adding to inflationary pressures. On the other hand, moderately higher taxes on precious metals, which would be consistent with the Government’s efforts to wean consumers away from gold, could lead to a standard rate closer to 17%.

  • A rationalization of exemptions under the GST will complement a similar effort already announced for corporate taxes, making for a much cleaner overall tax system. The rationalization of exemptions is especially salient for the Center, where exemptions have proliferated. Indeed, revenue neutrality for the Center can only be achieved if the base for the Center is similar to that of the States (which have fewer exemptions—90 products versus 300 for the Center);
  • The Committee recommends eliminating all taxes on inter-state trade (including the 1% additional tax) and replacing them by one GST will be critical to achieving the objective of “Make in India by Making One India”;
  • It would be advisable at an early stage in the future, and taking account of the experience of the GST, to consider bringing fully into the scope of the GST commodities that are proposed to be kept outside, either constitutionally or otherwise. Bringing alcohol and real estate within the scope of the GST would add the Government’s objectives of improving governance and reducing black money generation without compromising on States’ fiscal autonomy. Bringing electricity and petroleum within the scope of the GST could make Indian manufacturing more competitive; and eliminating the exemptions on health and education would make tax policy more consistent with social policy objectives.

The Committee in its concluding observations has stated that this is a historic opportunity for India to implement a game-changing tax reform. The nation is on the cusp of executing one of the most ambitious and remarkable tax reforms in its independent history. Domestically, it will help improve governance, strengthen tax institutions, facilitate “Make in India by Making One India,” and impart buoyancy to the tax base. It will also set the global standard for a Value Added Tax (VAT) in large federal systems in the years to come.

“The report has been submitted. The department of revenue and finance ministry will go through it and put it into consultation with state governments, through mutual consultation between the state and Centre, through the empowered committee.”

Shri. Shaktikanta Das, Economic Affairs Secreatary

Our Comments:

We welcome and appreciate the recommendations made by the Committee. The Industry has been keenly looking forward to this report and it is expected that recommendations of a modest rate will clear the way for implementation of the much-awaited GST regime.

Per the suggestion of the Committee, standard rate of 17-18%, appears modest for goods, presently levied with Excise duty of 12.5% at Central level and State levies ranging high between 14.5 to 15%. In contrast, the recommended rate will trigger concerns for the services, as services are likely to become expensive, considering the present Service tax rate of 14.5% (with Swachh Bharat Cess). Further, elimination of 1% additional tax on inter-state supply of goods is definitely a recommendation worth applauding.

(Author can be reached at Email: bimaljain@hotmail.com)

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