Over the past couple of years, predictions on the proposed rate of the Goods and Services Tax (GST) have fluctuated between 11 per cent and 27 per cent. This was not surprising since GST subsumed a lot of duties and taxes and a simple addition of these would have yielded a number in excess of 30 per cent.

The latest development on this is that the government may agree to a ‘standard’ GST rate, applicable to the bulk of goods and services, of 18 per cent as suggested by the Congress. So, what is the ideal rate for GST?

GST rate

Since the GST is set to subsume a number of taxes, it is difficult to arrive at an ideal rate. The peak rate of VAT in many States is 14.5 per cent and we have excise and service tax around the same levels. If we replace VAT with State GST and Excise/Service Tax with Central GST, we would get around 28 per cent as the ideal GST rate.

This is assuming that IGST would a part of the CGST rate and the “Help GST” for manufacturing States is done away with. If GST is pegged at 18 per cent, States may renew their demand for compensation — an issue that has been around for years now with no satisfactory solution.

When the Central Sales Tax (CST) was reduced from 4 per cent to 2 per cent, State governments demanded compensation.

After protracted negotiations, a settlement was reached in March 2015 to compensate the States ₹33,000 crore over three years for CST losses for the years 2010-11 to 2012-13.

The perception that State governments are losing out on CST may come in the way of a negotiated understanding on GST rates.

Compensation, and more

Compensation is State-specific. The Empowered Committee on GST needs to fix the compensation problem once and for all. Data can help here. A list could be made of the top 10 VAT revenue grossers for each State. A sensitivity analysis could be done of what would be the revenue under different rates of GST. Obviously, there is expected to be some revenue loss.

The Centre could then decide the amount of compensation it is willing to pay, after taking into account the increased payout recommended by the Fourteenth Finance Commission. If there is one area of agreement, it is that some products such as alcohol, tobacco and fuel would suffer a higher rate of duty.

If done across India, this arithmetic would not only fix the amount of compensation but also give indicators as to the ideal rate of GST. An effort will have to be made to arrive at the ideal GST rate in a scientific manner.

This is far better than accepting a rate given by the Opposition parties in the fervent hope that they will assent to the GST Bill. Fixing a rate of tax as a political decision is not a good idea.

If implemented properly, GST can be a game-changer. The present GST draft law is a diluted version. There are still many questions unanswered on GST — whether the tax will truly be on value-add, whether questions will be asked on input credit, and the benefits to SEZ units, etc.

An arbitrary rate of GST would only provide an opportunity to the government to increase this rate at their whim and fancy.

Since GST is a political tax now, governments and all other parties need to have a frank conversation on all aspects of the taxes. The ideal rate of GST would then no longer just be a percentage game.

The writer is a chartered accountant

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