The panel led by Chief Economic Advisor Arvind Subramanian has recommended a range of 15 to 15.5 per cent as the revenue neutral rate of the Goods and Services Tax, setting the stage for consensus building for this important reform to get through Parliament in the winter session.
In line with the Centre’s conciliatory stance, the report also suggested eliminating taxes on inter-State trade, including the proposed 1 per cent additional tax under GST to help promote “Make in India by making India one”.
But the Centre may be taking an unpopular decision if accepts the panel’s recommendation of the standard rate in the 16.9-17.9 per cent range that will make services costlier. Eating out, and telecom and banking services will become expensive. At present, these services are taxed at 14.5 per cent while the central excise duty is levied at 12 per cent.
The range for standard rates is in line with the Congress’ demand that the GST rate should be capped at 18 per cent.
“If the political process decides to have one rate for GST, it has to be either 15 per cent or 15.5 per cent. But if it chooses different rates, the standard rate will be between 17 per cent and 18 per cent,” said Subramanian after submitting the report to Finance Minister Arun Jaitley.
The panel also recommended other rates, with the lowest rate for goods at 12 per cent and the highest rate at 40 per cent. The highest rate is for demerit goods such as alcohol.
Though Subramanian maintained that his report was just a recommendation, it did echo Jaitley’s thinking. The CEA was categorical that tax rates should not be “constitutionalised” or included in the Constitution Amendment Bill, and this is what the report also proposes.
Subramanian said that the committee was “conservative” in its calculations and did not factor in any improvement to the GDP rate.
Talking to newsmen, Economic Affairs Secretary Shaktikanta Das said the report will now be discussed by the Centre and Empowered Committee of State Finance Ministers. “The submission of the report is a step towards the administrative preparedness for GST,” he said.
Despite the Centre striking a conciliatory note, the Congress is not too happy with the Subramanian panel’s recommendations. MP and economist Bhalchandra Mungekar, who was also a member of the Select Committee that studied the Constitution Amendment Bill for GST, told BusinessLine: “We had proposed 18 per cent standard rate, which is revenue neutral for the whole country. Globally, the rate is 8-12 per cent, and for a developing economy even 18 per cent is on the higher side.”
For better revenue mobilisation and controlling tax evasion, the tax structure needs to be simplified, he said. “Such fluctuating rates, as prescribed by the government, will be arbitrary. Now there is SGST and if we give freedom to States to decide their own rates, one State will adopt one rate and another State another. So this will defeat the purpose and rationale behind a concept like the GST,” he added.
R Muralidharan, Senior Director, Deloitte in India, said the proposed standard rate will be good for the industry as this would be considerably lower than the current 25 per cent tax incidence applicable on many products. “…but the cause of concern would be the increased service tax rate of 17-18 per cent and the higher rate of 40 per cent applicable on select products,” he said.