Subramanian panel for higher threshold for GST

Suggests Rs 40 lakh instead of Rs 25 lakh and leeway on fiscal deficit target schedule

The government panel to recommend rates for the proposed national goods and services tax (GST) has called for higher threshold. And, said the government could look at relaxing its fiscal deficit target if the rates in question seem likely to mean a revenue shortfall.

The committee, chaired by Chief Economic Advisor Arvind Subramanian, had given its recommendations to the finance minister last week. The contents were disclosed on Wednesday. “In the event of a revenue shortfall, the Centre and the States can both raise non-GST taxes (petroleum, tobacco and tobacco products, and alcohol); they can together raise GST rates; and, as a last resort, the Centre could even afford to relax its deficit target,” the report said.

That would, it says, be "actually an investment for implementing an unprecedentedly ambitious tax reform with enormous long-run gains; moreover, a moderately higher deficit due to a low GST will benefit consumers, especially poorer ones”.

Minimising the burden on small taxpayers would call for higher thresholds. This would also achieve a social objective, as poorer households are more likely to buy from smaller outlets. “The current proposal is to have a common threshold of Rs 25 lakh for goods and services combined but raising this, say, up to Rs 40 lakh may be considered. Also, the option should be given to firms to be part of the GST chain even if below the exemption threshold,” it said.

Last week, Subramanian had said the panel feels the one per extra cent levy proposed on GST for inter-state trade, to help manufacturing states, should be dropped.

It has suggested the main or standard GST rate be 16.9-18.9 per cent, with the preferred rate between 16.9 per cent and 17.7 per cent. The standard rate will apply to most goods and services in the new indirect tax regime. These rates were calculated by excluding real estate, electricity, alcohol and petroleum products.

The panel also recommended other rates, with the lower one for goods at 12 per cent and the highest at 40 per cent. The highest rate is for 'demerit goods' such as alcohol, luxury cars and tobacco. On precious metals, two to six per cent. As this rate increases, the main GST rate should come down.

The report said in the case of a dual rate GST, an 18 per cent standard rate would impact retail inflation by -0.1 per cent if all producers reacted to headline tax changes and 0 per cent if they did so after adjusting for input tax credits as well. Under a dual rate structure, food and beverages would see almost no price increase and neither would fuel and lighting, important for protecting poorer consumers.

“One risk of setting an revenue-neutral rate that is low is the re-emergence of a trust deficit between the Centre and the States, as happened in relation to compensation for lost CST revenues after the global financial crisis. The second risk of setting a low RNR is that it could interact with slower growth and/or weaker buoyancy, going forward, to magnify the revenue shortfall,” the report said.