GST - historic opportunity for India to implement game-changing tax reform - Arvind Subramanian Panel
THE Committee headed by the Chief Economic Adviser Dr. Arvind Subramanian on Possible Tax rates under GST has submitted its Report to the Finance Minister.
Summary of Recommended Rate Options (in percent)
RNR | Rate on precious metals | "Low" rate (goods) | "Standard" rate (goods and services) | "High/Demerit" rate or Non-GST excise (goods) | |
|---|---|---|---|---|---|
Preferred | 15 | 6 | 12 | 16.9 | 40 |
4 | 17.3 | ||||
2 | 17.7 | ||||
Alternative | 15.5 | 6 | 12 | 18.0 | 40 |
4 | 18.4 | ||||
2 | 18.9 | ||||
- On the RNR, the Committee's view is that the range should be between 15 percent and 15.5 percent (Centre and states combined) but with a preference for the lower end of that range.
- On structure, in line with growing international practice and with a view to facilitating compliance and administration, India should strive toward a one-rate structure as the medium-term goal.
- Meanwhile, the Committee recommends a two-rate structure. In order to ensure that the standard rate is kept close to the RNR, the maximum possible tax base should be taxed at the standard rate. The Committee would recommend that lower rates be kept around 12 per cent (Centre plus states) with standard rates varying between 17 and 18 per cent.
- It is now growing international practice to levy sin/demerit rates—in the form of excises outside the scope of the GST--on goods and services that create negative externalities for the economy.
- This historic opportunity of cleaning up the tax system is necessary in itself but also to support GST rates that facilitate rather than burden compliance.
- The GST also represents a historic opportunity to rationalize the tax system that is complicated in terms of rates and structures and has become an "Exemptions Raj,” rife with opportunities for selectivity and discretion. Tax policy cannot be overly burdened with achieving industrial, regional, and social policy goals; more targeted instruments should be found to meet such goals, for example, easing the costs of doing business, public investment, and direct benefit transfers, respectively; cesses should be reduced and sparingly used. Another problem with exemptions is that, by breaking up the value-added chain, they lead in practice to a multiplicity of rates that is unpredictable, obscured, and distortionary.
- The rationalization of exemptions is especially salient for the centre, where exemptions have proliferated. Indeed, revenue neutrality for the centre can only be achieved if the base for the centre is similar to that of the states (which have fewer exemptions - 90 products versus 300 for the center). If policy objectives have to be met, instruments other than tax exemptions such as direct transfers could be deployed.
- The Committee's recommendations on rates summarized in the table above are all national rates, comprising the sum of central and state GST rates. How these combined rates are allocated between the centre and states will be determined by the GST Council. This allocation must reflect the revenue requirements of the Centre and states so that revenues are protected. For example, a standard rate of 17% would lead to rates at the Centre and states of say 8 percent and 9 percent, respectively. The Committee considers that there are sound reasons not to provide for an administration-complicating "band” of rates, especially given the considerable flexibility and autonomy that states will preserve under the GST (including the ability to tax petroleum, alcohol, and other goods and services).
- Implementing the GST will lead to some uncharted waters, especially in relation to services taxation by the states. Preliminary analysis in this report indicates that there should not be large shifts in the tax base in moving to the GST, implying that overall compensation may not be large. Nevertheless, fair, transparent, and credible compensation will create the conditions for effective implementation by the states and for engendering trust between the Centre and states;
- The GST also represents a historic opportunity to Make in India by Making One India. Eliminating all taxes on inter-state trade (including the 1 percent additional duty) and replacing them by one GST will be critical to achieving this objective;
Will GST now get through Rajya Sabha? We will know in a few days.