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A select committee of the Rajya Sabha has observed that the standard Goods and Services Tax (GST) rate should be within 20 per cent, while the lower one should not cross 14 per cent. These rates are quite lower than the Revenue Neutral Rate (RNR) of around 27 per cent, arrived at by the sub-panel of the Empowered Committee of State Finance Ministers on GST, earlier. Besides, the panel suggested changes in the two important provisions of the Constitution Amendment Bill on GST - one per cent additional tax over GST on interstate supply of goods to help the producing states, and reduction in compensation to states in the fourth and fifth years.
In its crucial report on the Constitution Amendment Bill on GST, submitted to the Rajya Sabha on Wednesday, the committee recommended that the proposed GST council may opt for a broad-based and moderate rate as the high rate will surely erode the confidence of the consumers badly and may lead to high inflation. In its dissent note, the Congress wanted the GST rate to be within 18 per cent.
It should be noted here that the committee did not recommend any specific rate, but made an observation: "To start with, India's GST rate should not go beyond 20 per cent for standard rate, and perhaps 14 per cent for reduced rate."
It was so because the Constitution Amendment Bill, which was vetted by the panel, does not have any provision for the specific rates. It was left to the proposed GST council, a body of the union and state finance ministers. In fact, even the committee's observation drew flak from AIADMK in its dissent note. "The select committee has gone beyond its brief on the issue of Revenue Neutral Rate (RNR)... This is a matter for the Empowered Committee of State Finance Ministers, GST council to take an appropriate view."
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The committee also favoured that Centre and states should have powers to impose the GST rate in a range over the floor rate, and wanted this band to be specifically defined in GST laws.
Earlier, a sub-panel of the Empowered Committee had recommended an RNR of around 27 per cent, to be broken into state GST of 13.91 per cent, and the central GST of 12.77 per cent. A committee, headed by Chief Economic Advisor Arvind Subramanian, is looking into the issue, and is expected to submit its report in four to six weeks.
In fact, the Rajya Sabha panel, chaired by BJP MP Bhupender Yadav, observed that there is no necessity to strictly go by the RNR, while fixing the GST rate.
Currently, the Union service tax rate is at 14 per cent, and the general excise duty at 12 per cent. On the states’ side, VAT is supposed to be 12.5 per cent at standard rate, and 5 per cent at lower rate. However, many states have breached the 12.5 per cent limit on VAT. All these rates would be subsumed in GST along with local taxes, with some exceptions.
Earlier, Finance Minister Arun Jaitley had assured the Lok Sabha that the GST rate would be much lower than 27 per cent.
The committee’s observation on GST rate has evoked positive reaction from tax experts. “The recommendation to keep the rate of GST at 20 per cent is a welcome one, and a lower rate will increase economic activity in the country and hence, revenues,” said Bipin Sapra, tax partner, EY India.
R Muralidharan, senior director, Deloitte India, said while implementing this new tax reform, it is also necessary for the government to ensure that the basic features of an ideal GST are not diluted much. “Towards this, it is necessary to widen the tax base, but keep the GST rates moderate (below 20 per cent).”
In this context, the committee also dealt with another issue of protecting interests of local bodies and gram panchayats. While it shared the views of members and experts that interests of these bodies should be protected, it also sounded a note of caution that it would not be appropriate for the committee to recommend to the state governments what they have to do with regard to the interests of the local bodies.
Besides, the committee recommended two important changes in the proposed GST regime - limiting up to one per cent tax over GST to only those interstate supply of goods, which are for a monetary consideration, and expanding full compensation to states for any revenue losses to five years against the current three years.
The select committee wanted that the exact definition of interstate supply of goods, which would attract one per cent tax, be made at the time of framing GST laws.
The Constitution Amendment Bill, passed by the Lok Sabha earlier, has a provision of one per cent additional tax over GST for interstate supply of goods to help producing states, since GST is a destination-based tax. However, this evoked strong criticism from industry and experts as it would lead to a cascading effect.
To address the interests of the two sides, the panel recommended that the proposed GST law should explicitly state that the interstate movement of goods would not be taxable, if it is supplied without any monetary consideration.
“The committee feels that the provision of one per cent additional tax in its present form is likely to lead to cascading of taxes. Therefore, the committee strongly recommends that in the concerned GST law, an explanation should be given that for the purpose of clause 18, the word “supply” would mean all forms of supply made for a consideration,” the report said. The clause 18 of the Constitution Amendment Bill deals with the one per cent tax. Basically, what this recommendation means is that one per cent tax would be levied on interstate sale of goods, and not on stocks transfer within the company.
However, experts do not think that this would entirely address the issue of cascading. “It is like converting a jail term to a jail term with bail,” said Satya Poddar, tax consultant, EY. He said it would do away with one per cent tax on stocks transfer or depot transfers from one state to another within a company. This kind of transfer constitutes around 75 per cent of the interstate supply of goods, he added.
It should be noted that the Constitution Amendment Bill is an enabling mechanism to allow the Centre and states to impose GST. After the Bill is passed, the new indirect tax regime would need another central law as well as state laws on GST. It is in these laws that the committee wanted this explanation to be incorporated.
The Congress, in its dissent note, wanted to eliminate the one per cent tax altogether since it is market distortionary.
Finance Minister Arun Jaitley said the government will try and build a consensus on the legislation and explain the rationale and reasoning to various parties, including the Congress.
“It is hardly a dissent note on the Bill; it is a dissent against the Congress party’s own proposals, which were originally given. Congress MPs are expressing dissent against the suggestions made by their own chief ministers,” Jaitley said. Besides the Congress and AIADMK, the Left parties also submitted a dissent note.
Jaitley said the government will go ahead with the legislation in Parliament that seeks to create a simplified tax structure across the country, which is “revolutionary”.
The select panel also recommended that compensation to states should not taper from the fourth year onwards. The present Bill mentions that states would be fully compensated for their losses for three years, but it would reduce to 75 per cent in the fourth year, and 50 per cent in the fifth year.
“Parliament may, by law, on the recommendation of the GST council, provide for compensation to the states for the loss of revenue arising on account of implementation of the GST for a period of five years,” the report said.
The panel rejected the ideas of having a separate dispute resolution tribunal, changes in the voting powers of the Centre and states in the proposed GST council, among others.
The Constitutional Amendment Bill requires a two-thirds majority in the Upper House of members present and voting to be cleared. Thereafter it will need to be ratified by at least 15 out of the 29 states. The government is keen that it be passed in this monsoon session so that the GST regime can be introduced by the April 1, 2016 deadline. The Lok Sabha has already cleared the Bill.
