The third meeting of the GST council (October 18-19), primarily to finalise the rate structure, compensation mechanism to states and issue of ‘dual control’ in tax administration can be termed as ‘partially’ successful.
There were two key outcomes from the meeting. First, there seems to be a consensus on the mechanism of compensation by the centre to the states by taking FY16 as the base year and 14% annual growth over the base year. This looks far simpler than earlier discussions about taking three years out of last five or an average of last five years, etc., for arriving at the base amount. States seemed happy with this consensus and with that the focus moved to the rate structure.
As expected, the proposal mooted was for multiple rate slabs of 6, 12, 18 and 26%. This is in contrast with earlier discussions (emanating out of the CEA report) about primarily two slabs of 12 and 18, with a proposition of 40% on few ‘sin’ or ‘luxury’ products. Having a lower rate of 6%, which seems to be primarily meant for food products and other essential items, makes sense as increasing the effective rate on these products to 12% could have been inflationary and detrimental to the common man.
The other departure from the earlier thinking was to have a new slab of 26% for certain products, possibly the ones the CEA recommended to put in 40% slab such as tobacco, luxury cars etc. Principally, this line of thinking looks reasonable, as a differential of 22% (between 40% and standard rate of 18%) was too steep and unprecedented. However, there were two big surprises here. First, there was a reference to ‘luxury products’, other than those contemplated in the CEA report. While there were no official words on the additional products which could fall here, possibility of certain consumer durable and FMCG products falling into this category was doing the rounds. Till now, the industry (including FMCG, consumer durables etc.) had been expecting a standard rate of around 18% and had factored that in their business plans. The government had also been saying that there would be a consequent price reduction in these segments as the effective rate of tax would drop from current 25-27% to around 18%, making them cheaper for the common man.
It appears that the government is trying to compare the possible GST rates with the existing rate of tax on a product-by-product basis, which may not be the best strategy, when the country is on the cusp of a radical tax reform. Instead, the focus should be to have most of the products at a standard rate (of 18%) and bank on increased consumption, more manufacturing and economic activity leading to revenue buoyancy.
The second and bigger issue is the proposal that products under this category could attract a central cess (under Article 270 of the Constitution, Centre has a right to impose such cesses) to fund the compensation to be given to states, if any. While there does not seem to be a consensus on this cess as yet, initial indications are that most states are in agreement with the mechanism. I think having a cess is not a good idea and there are many reasons for it.
To start with, right from the first discussion paper on GST, issued by the then Empowered Committee in 2009, industry has been told that all cesses and surcharges will be subsumed under GST. This has been reiterated over the years in various official documents and the government interactions, including the FAQ document issued by CBEC last month, which says that ‘central surcharges and cesses so far as they relate to supply of goods and services’ would be subsumed in GST. A simple tax rate structure, with uniform classification across states, with no additional layering of tax, was one of the reasons why GST got such an overwhelming support from all stakeholders.
Currently, many of these cesses (like automobile cess, NCCD, etc.) are applied at the stage of manufacturing only and are not credible for businesses. However, since GST is on all supplies, it is not clear whether this cess will also apply at each leg of supply chain, which would further lead to cascading of tax. Further, it seems that thinking is to have different rates of cess for different products, as the idea is to recover the differential between the current effective rate of tax and 26%, which will lead to further complications.
Also, it is not certain if the Centre would actually need to compensate the states, given the fact that there are estimates of additional GDP growth between 1-2% on account of GST. The experience of VAT also suggests that revenue growth of the states could be significant. Economists would argue that if GST rates are moderate, it would boost the consumption and will result in overall increase of tax base for the government.
It is also expected that parallel economy will shrink under GST, which could also lead to increased income tax collections. In any case, there are various taxes which are outside the GST net, which can be used as additional revenue generating measures. These include excise duty on tobacco, taxes on petroleum products, stamp duties and so on.
The other problem with having a slab of 26% is the subjectivity in defining what would constitute a ‘luxury’ product. Till a decade back, probably a television could qualify as a luxury product, which is not the case today. Same is the case with four wheelers, air conditioners and so on. Similarly, it’s a matter of debate as to whether an aerated beverage is a luxury product or not, given that studies point that more than 90% sales are made to people other than high income class.
As it is, India is making a departure from a classical GST system in many ways, including proposing the multiple rate structure, which seems to be the only realistic way of moving ahead as of now. However, imposition of cess and broad-basing of this proposed 26% slab, may be too much of a diversion from what was envisaged till now. This does require a serious rethink. Source – www.financialexpress.com [21-10-2016]