GST: Thrust on pruning exemptions

A panel led by Chief Economic Advisor Arvind Subramanian on Friday submitted its report on the long awaited Goods and Services Tax (GST). It recommends a revenue neutral rate (RNR) of 15-15.5 per cent and a standard rate for taxing most goods and services at 16.9 to 18.9 per cent.

RNR is the rate which, if implemented, results in a 'no win, no loss' for the Centre and the states. In the context of a welfare economy like India however, the standard rate is more important as it ensures revenue for both to account for subsidies, as also spillages and shortfalls, due to faulty implementation of policies.

To shore up revenues and provide leeway to states and the Centre for preferential treatment to certain sectors, the panel has opted for a dual rate, providing a range of 12 to 40 per cent for low and high rate goods and services. But Subramanian made a passionate plea to keep exemptions at a bare minimum to keep the spirit of a unified nationwide tax .

The higher bracket of taxes will most likely be for luxury cars, cigarettes and other tobacco products. For now, the panel has set aside exemptions in 90 cases while arriving at the rates. Petroleum products, electricity, real estate and liquor, for example, are part of the exemption list.

The panel has recommended against levying a 1 per cent interstate tax on transfer of goods -something that has been proposed in recent times as the government seeks to win over states that believe they will lose out on revenue in the long term.

It also advised against the specifics of the tax policy including the rate in the constitution, a key demand of the Congress, as it would limit the freedom required to react to macroeconomic conditions in future. The ruling NDA government does not have a majority in the upper house of Parliament and needs the support of the Congress and other regional parties to ensure passage of the GST bill.    

"Implementing a new tax, encompassing both goods and services, to be implemented by the centre, states and 2 union territories, in a large and complex federal system via a constitutional amendment requiring broad political consensus, affecting potentially 2-2.5 million tax entities and marshalling the latest technology to use and improve tax implementation capability is perhaps unprecedented in modern global tax history," said Subramanian. "If we can pull this off, Indian GST will be the cleanest dual tax that incorporates the best of central and decentralised taxation systems around the world. This can be the gold standard globally."

The thrust of the panel's recommendations has been on pruning exemptions and the Centre with 300 exemptions, compared with 90 in the case of states, has a bigger challenge at hand. At the same time, Subramanian sought time for GST to show results and warned against any short term negative reactions.

"It is in the nature of the exercise that it will be difficult and there will be confusion and lag. There will be teething problems and one should not burden the initial years by judging it prematurely and making it difficult to implement," he said. "If six months into implementation revenues are seen to be falling a little short, there should not be a hasty decision to raise rates until such time it becomes clear that the shortfall is not due to implementation issues. Facilitating easy implementation and tax payer compliance at an early stage will be critical."

Lack of consensus among successive political establishments and fear of loss of revenue and autonomy among states has held up the implementation of the tax reform. It is widely believed that GST can unlock the potential of the Indian economy. For example, Prime Minister Narendra Modi who is passionately advocating GST today, himself opposed it as the chief minister of Gujarat for almost seven years. A single rate on products and services facilitates free trade across states, and a value-added structure does away with the problem of cascading tax (or tax on tax).

"There is a whole new logistics chain that is being built in India and GST will be a massive boost,"said Jayant Sinha, Minister of State for Finance. "Which is why GST is so important. It will take a lot of cost and complexity out of the system, it will bring down prices because the cascading effect of prices will stop. People believe the cascading impact of taxes right now is over 30 per cent. So, if we have a reasonable GST rate, prices, complexity, cost of doing business will come down. Which is why people believe there is a 0.5-1 per cent boost to growth rate if GST happens."

"The recommended GST rate of 16.9 of 18.9 percent is hugely welcome though the demerit rate of 40 per cent looks to be on a much higher side. Doing away with one percent additional tax is a welcome move and may pave the way for GST to come through." said Rajeev Dimri, Leader, Indirect Tax, BMR & associates.

"The idea of not putting rate caps in the constitution is pragmatic considering the dynamic business environment which may demand future changes in the GST rate. Recommendation for wider coverage of sectors (including petroleum) within GST  is much desirable in the interest of a cleaner indirect tax regime."