GST rates likely to be in the range of 20-23%

NIPFP working on this and Jaitley tells Lok Sabha 27% is too high; also says will be ensuring against cascade effect of origin tax; finance ministers' panel meets today

The proposed national goods and services tax (GST) rates could be 20-23 per cent, if recommendations of the National Institute of Public Finance and Policy (NIPFP) are accepted by the Centre and states.

Sources said NIPFP is going to recommend this range to the Empowered Committee (EC) of State Finance Ministers. The panel meets in Thiruvananthapuram on Thursday and this item might be discussed, though the report has not been given yet. The meet will also take up the issue of compensation to states and an information technology ‘backbone’ for the GST, termed GST-Network.

In the Lok Sabha, on the GST amendment Bill, Finance Minister Arun Jaitley said the rates would be much below the 27 per cent recommended by a sub-panel of the EC. “I straightaway concede that 27 per cent would be very high...after this 27 per cent (revenue-neutral rate or RNR, at which no revenue loss to states is likely on adoption of GST) was born, the states and the Centre have decided to keep alcohol out,” he said. Adding that both had the same view on this.
 

“We have decided to keep petroleum out and no state is interested in imposing higher taxes on its people and neither the central government. Therefore, this (RNR) figure is going to be much more diluted compared to the figure (27 per cent) mentioned,” he said.

He said the 13th Finance Commission had suggested 18 per cent as a possible figure. However, it had also suggested a different model of GST compared to what is being considered now.

Currently, the Union excise duty rate is 12 per cent on most goods, while value-added tax (VAT) is 12.5 per cent in most states. This combines to 24.5 per cent. Then, there are purchase taxes in some states and a central sales tax of two per cent on inter-state movement of goods. From this point of view, a goods tax at 27 per cent seems too high, given that VAT also gives input credit and so does excise duty in most cases.

Service tax will, however, be 14 per cent from June and making it 27 per cent would again be too high a rate. Currently, only the Centre can impose service tax.

On the 27 per cent RNR recommended earlier by a EC panel, the state GST (SGST) component was recommended at 13.91 per cent and central GST at 12.77 per cent. The committee had also proposed a narrow band for the SGST component.

The recommendations were referred by the EC to NIPFP, since it was based on revenue collection figures of 2011-12.

Prashant Deshpande, Senior Director, Deloitte in India, said 27 per cent GST rate would be a non-starter. “The rate should address the issue of all — industry, states and consumers," Deshpande said.

GST rates are not part of the constitutional amendment Bill. It would be decided later by the proposed GST Council, comprising the Union and state finance ministers.

The Bill also tries to allay the concerns of manufacturing states. It seeks to impose a one per cent origin tax, to be given to these states. However, there are concerns that this tax will have a cascade effect and, hence, work against the overall theme of a GST. Jaitley assured the Lok Sabha that this was being worked out, to ensure this did not happen.

Harishanker Subramaniam, national leader-indirect tax services, EY India, says: “The FM’s statement that the one per cent origin tax will not be cascading, though welcome, needs to be reflected in fine print.”

The Lok Sabha rejected many amendments moved by opposition parties, including keeping petroleum outside a GST and imposition of an environmental tax for mineral-rich states like Odisha.

Jaitley assured the states that their losses would be met by the Centre through a tapering mechanism for five years. The Centre would give the states full compensation for the first three years, 75 per cent in the fourth year and 50 per cent in the fifth. Some opposition parties, such as Tamil Nadu's AIADMK, wanted to know what would happen to states after five years. Jaitley tried to convince them that they'd not incur losses in the first place because they'd be imposing a service tax as well.

TAX REGIME
The current indirect tax regime

STATES — ON GOODS

• State levies value-added tax on goods — 4% at lower end, 12.5% at higher end (some states have also breached this limit)
   
• There is an input credit given to the user of these inputs
   
• For inter-state movement of goods, the state from where the goods move, get 2% tax
   
• Some states impose entry tax such as purchase tax

STATES — ON SERVICES

• States do not have power to impose service tax, barring some say on entertainment

Centre — Goods

• Imposes excise duty on manufacturing, which is generally  12%, but there is a huge range
  

 

Gives cenvat credit, which is like an input credit
 

Imposes customs duty on import of goods

Centre — Services

• Imposes 14% tax on services, except a narrow negative list

PROPOSED GOODS AND SERVICES TAX

States — goods tax

• States will impose goods tax from manufacturing to sales
   
• States where goods are sold will get tax
   
• Manufacturing state will get 1% tax for 2 years
   
• All entry-level taxes would be subsumed
   
• CST will be subsumed

States — Services

• States will  impose service tax as well
   
• Place of service rules will be worked out to clarify which states will get tax

Centre — goods

• Centre will impose goods tax, from sales to manufacturing
   
• Customs duty will remain with the Centre

INTEGRATED GST

• It would be imposed on inter-state supply of goods and services
   
• Will be collected by the Centre and given to the consuming states