 "Harishanker Subramaniam")
India's goods and services tax (GST) journey is in its critical phase with the GST Council debating important issues such as rate structure, administrative ease and the GST law. Multiple rate structure is the pragmatic way forward, and aligned to the report by the committee headed by the chief economic advisor. While the debate around what will fall in which rate basket continues, it is important we have consistent classification across states to avoid issues.
The emerging rate structure is four per cent, six per cent, 12 per cent, 18 per cent and 26 per cent, and the principle appears to be such that goods that currently have an effective indirect tax rate structure (value added tax, excise, central sales tax included) equal to or closer to these rate buckets will tend to fall in those rate buckets. The idea is to maintain the current effective indirect rate in the new GST rate structure with some upside in GST chain due to lower cascading. The 26 per cent peak rate basket means goods with existing effective indirect tax in that range are likely to be covered here. With 40 per cent rate structure, only luxury and de-merit goods could have been covered there and the rest could have been at 18 per cent or below and would be more beneficial for industry leading to lowering of prices.
Luxury and de-merit goods are also expected to be in this peak rate basket. In cases where the existing effective indirect taxes on such goods are more than 26 per cent, say, hypothetically 46 per cent, the delta percentage of additional 20 can potentially be applied through a cess mechanism. Cess in such cases is likely to be through Article 271 route, which the Centre will apply. The jury is still not out on this cess mechanism and may get clarified in the next Council meeting.
As a concept, cess is avoidable and industry will not be happy as it will tend to complicate the GST system. Till date, the idea has been to merge all cesses on goods and services within GST and allow credit through the chain. The cess compulsion seems to have emerged as a compensation mechanism for Centre in case states need compensation under GST. The other alternative will be to increase GST peak rate beyond 26 per cent, which may be cleaner, but the quantum of such increase becomes critical. Better tax compliance under the new regime is something that seems to have been underestimated, both under GST and income tax unless the revenue buoyancy expectations are proved wrong. So, a better idea would have been to wait and watch in the initial years.
The writer is national leader, indirect tax, EY India. Views are personal
Harishanker Subramaniam
National leader, indirect tax, EY India
