Three-year road map to kick off in April next year with three rates. Finance Minister Pranab Mukherjee today unveiled a three-year plan for moving to a single-rate goods and services tax (GST) regime of 16 per cent for the Centre as well as the states.
To begin with, next year, he suggested, the Centre will adopt a three-rate formula. While Mukherjee proposed that the rate of taxation for services be fixed at 8 per cent, a dual-rate regime for goods was recommended at the meeting of the empowered committee of state finance ministers. The Centre plans to keep a lower rate of 6 per cent for certain goods and maintain a standard rate of 10 per cent in the first year.
In case the states agree to the formula, the standard GST rate will be 20 per cent since states and the Centre will levy 10 per cent each on goods. For products which will attract a lower rate, the total GST burden will be 12 per cent, assuming that the Centre and the states agree to levy 6 per cent each on these products.
Mukherjee, who deferred the roll out of the new indirect tax regime by a year to April 2011 due to a lack of consensus, urged the states to adopt a similar rate structure. “This mutually supportive approach will ensure that we have a single rate for CGST (Central GST) and SGST (state GST) in the range of 12 to 20 per cent in the first year of GST introduction. The peak effective rate will be about 15 per cent, which will be quite acceptable to the trade and industry. Eventually, it will settle down to a level of 16-18 per cent for both CGST and SGST, which will mean an effective rate of 12 per cent,” the finance minister said.
Mukherjee suggested that the Centre and the states lower the standard rate for goods to 9 per cent in the second year or from April 2012, if everything goes as per plan, while retaining the lower rate of 6 per cent for goods as also the service tax rate at 8 per cent. Going by this formula, the combined effect of GST on a product with standard rate will be 18 per cent (9 per cent of Central GST and an equal levy of state GST).
And, if tax collections remain buoyant and there is not too much burden of compensation for the Centre, all rates for goods as well as services could converge at 8 per cent, Mukherjee said. So, this will result in a 16 per cent GST (8 per cent each for Central GST and state GST).
The 16 per cent burden will be higher than what was originally proposed by a task force of the 13th Finance Commission which recommended a combined GST levy of 12 per cent.
The Centre and the states are trying to evolve a consensus on various aspects of the new tax regime ahead of the planned rollout from April. All central and state taxes like excise, value added tax and service tax will be rolled into GST, once the new regime comes into effect.
“Rates are determined almost at the end… We are discussing among ourselves. We can’t go public unless we form the final view,” Empowered Committee Chairman and West Bengal Finance Minister Asim Dasgupta told reporters after a meeting of state finance ministers with Mukherjee.
He added the Centre and the states also agreed to keep petrol, diesel, alcohol and electricity out of GST.
Finance ministers, including those from the Bharatiya Janata Party-ruled states, appeared positive on the proposal though they suggested minor tweaking. Even Madhya Pradesh Finance Minister Raghavji, who is most critical of the Centre’s proposal on GST, said the revenue-neutral rate should be 17-18 per cent.
“The proposals would mean that for end-consumers (of services such as phone, insurance and DTH), the cost could go up, as the current service tax rate is 10 per cent. However, the incremental impact should be less than 6 per cent, as the service providers may pass on some of the savings on procurements (such as central sales tax) to the customers. There would only be a cash flow impact on business to business services,” said KPMG Executive Director Pratik Jain.
On impact on goods, he said, the prevailing effective tax incidence on most consumer products is more than 20 per cent, with excise, duty of 10.3 per cent and VAT of 12.5 per cent or more. In addition, businesses would also have savings on their purchases, which could also be passed on to consumers.
To ensure harmony between the Centre and the states once GST is rolled out, the Union government has also asked the states to settle for a common exemption threshold of Rs 10 lakh. At present, in case of central excise the threshold is Rs 1.5 crore, so any unit with a turnover below the prescribed level is exempted from payment of the levy.
The GST rates have been decided considering an assessee base of 6 million and a common threshold of Rs 10 lakh for both the Centre and the states.
Besides, Mukherjee said the list of items from central excise is also being reviewed, so that the list of goods exempt from CGST is aligned to the SGST list and 99 items currently exempt from VAT are exempt from both components of GST.
The suggestion on rates came with a comfort from the finance minister that the Centre will provide full compensation to the states for undertaking a reduction in the Central sales tax in 2009-10. For the current financial year, the compensation formula would be based on the recommendations of the empowered committee of state finance ministers.
| THE MUKHERJEE FORMULA ON PROPOSED GST RATES (in per cent) | ||||
| Central GST |
State GST |
Total liablity |
||
| Apr ‘11 | Goods (lower rate) | 6 | 6 | 12 |
| Goods (standard rate) | 10 | 10 | 20 | |
| Services | 8 | 8 | 16 | |
| Apr ‘12 | Goods (lower rate) | 6 | 6 | 12 |
| Goods (standard rate) | 9 | 9 | 18 | |
| Services | 8 | 8 | 16 | |
| Apr ‘13 onwards |
Goods (standard rate) | 8 | 8 | 16 |
| Services | 8 | 8 | 16 | |
The minister once again assured the states that the Centre would “step up the amount of compensation recommended by 13th Finance Commission should the need arise, based on a mutually agreed formula”.
The finance commission had asked the Union government to set aside Rs 50,000 crore to compensate states for the possible revenue loss incurred on account of implementation of GST.
Mukherjee assured the states that the compensation for subsuming purchase tax on foodgrains in GST would be provided along with VAT compensation for the next four years, and a reference would be made to the 14th Finance Commission to address the issue beyond 2013.
The announcements made by the Hon. Finance Minister on the GST Road Map are positive both on the contents and the intention on GST implementation from 1 April 2011. The process of gradually moving from different rates for essential goods, other goods and for services to a single rate over a period of 3 years from FY 2011-12 to FY 2013-14 is a welcome measure as it will prepare the trade, industry and consumers for adopting a single rate and also smoothen the impact of any price changes in the market place. However, the implications in respect of various exemptions etc provided under Central Excise, VAT etc and how it would get addressed under GST may need to be examined by businesses to conclude on their respective competitiveness. Further, the rate of 16% for services is higher than the present rate of 10.3% and the rate earlier envisaged. GST will usher in an era of competitiveness on the export front and will significantly enhance the pricing power of the Indian exporters.