Some critical issues are pending before the GST Council for a final decision. Comments have been made in the public space with regard to two of these issues. Even though the final decision with regard to these two issues is yet to be taken by the GST Council, the rationale behind the proposals placed before the Council needs to be explained.
The multi rate structure
It has been proposed to the Council that there should be a four slab multi-rate tax structure. Items constituting nearly 50 per cent of the weightage in the Consumer Price Index basket (mainly food items), are proposed to be exempted from the levy of the GST. There will be a zero tax on such items. The object of this is to ensure that the GST structure is not regressive or burdensome on the common man.
Of the balance items, a tax rate of 6 per cent, 12 per cent, 18 per cent and 26 per cent has been suggested. The principal rationale behind this tax structure is that items which are presently taxed at rates closer to the range of each of the slabs will be fitted into the particular rate of the slab.
Those currently taxed below 3 per cent as the total tax of the Centre and the States will be taxed at a zero rate. Those between 3-9 per cent will be taxed at a 6 per cent rate, those between 9-15 per cent will be taxed at 12 per cent and there would be a standard rate of 18 per cent.
Some have suggested that multiple tax rate is disadvantageous to the GST and would neutralise some of the advantages of a uniform tax structure. The reality is that a multiple tax rate in India is inevitable for several reasons.
Different items used by different segments of society have to be taxed differently. Otherwise the GST would be regressive. Air conditioners and hawai chappals cannot be taxed at the same rate. Total tax eventually collected has to be revenue neutral. The Government should not lose money necessary for expenditure nor make a windfall gain. The tax on some products in a narrow slab regime will substantially increase.
This would be highly inflationary. A commodity being taxed by the Centre and the State at 11 per cent at present will be taxed at 12 per cent. If it’s taxation is suddenly raised on standard rate of 18 per cent, it would disrupt the market and would be highly inflationary.
There are presently several items mainly used by the more affluent which are currently taxed at a VAT of 14.5 per cent and an excise of 12.5 per cent. If the cascading effect of these taxes and octroi is added, then range of taxation of these products is between 27-31 per cent. It has been proposed to the Council to fix the rate of these items at 26 per cent. Some of the items which are now being used by the lower middle classes will eventually be proposed to be shifted to the 18 per cent bracket.
With regard to demerit and luxury goods which are taxed globally at a higher rate, no rebates are contemplated. Each good would be taxed on the basis of its own demerit.
Compensation payable through cess
The GST will result in the consuming States increasing their revenues from the very first year onwards. The GST Council has fixed a 14 per cent revenue growth as a uniform, secular growth rate for all States. The revenue loss, if any, of a State has to be calculated on this basis. Some producing States may lose marginally in the initial years. The Constitutional amendment guarantees a five year compensation to these States.
The moot question is as to how is this to be funded by the Central Government? If the Central Government has to borrow money to fund the compensation, it would add to its liability and increasing the cost of borrowing by the Centre, the State Governments and the private sector.
There is no rationale for increasing direct tax for this purpose. Theoretically it has been argued that the compensation be funded out of an additional tax in the GST rather than by cess.
Assuming that the compensation is Rs. 50,000 crore for the first year, the total tax impact of funding the compensation through a tax would be abnormally high. A rupees 1.72 lakh crore of tax would have to be imposed for the Central Government to get Rs. 50,000 crores in order to fund the compensation. 50 per cent of the tax collected would go to the States as their GST share and of the balance 50 per cent in the hands of the Centre and 42 per cent more would go to the States as devolution. So out of every 100 rupees collected in GST only 29 per cent remains with the centre. The tax impact of this levy would be exorbitantly high and almost unbearable.
The alternative proposal is to have a cess account and continue same existing levies as cess for a period of five years before subsuming them as tax. This would include clean energy cess and cesses on luxury items and tobacco products, which in any case, presently also pay levy higher than 26 per cent. This would ensure no additional burden on the tax payer and yet be able to compensate the losing States. It may further be noticed that benefiting States are not compensating the losing states. The Centre, as a non-beneficiary, has to compensate and the proposal for continuing existing cesses for five years to the extent of compensation required is the more benign way of compensating the losing States without burdening the tax payer.
These are only at the proposal stage and would be discussed at length in the meeting of the GST Council early next month. Source – http://www.thehindubusinessline.com [26-10-2016]
Panagariya defends 4 GST rates and cess
NITI Aayog Vice-Chairman Arvind Panagariya on Monday took on critics of the Centre’s proposals to levy a cess on top of the Goods and Services Tax (GST) with four tax slabs ranging from six per cent to 26 per cent apart from a zero-tax category.
Moving to just two rates or a single GST rate, instead of the four rates in the range proposed by the finance ministry to the GST Council, could trigger inflation in some products and services, Mr. Panagariya said. The cess on GST would help the Centre compensate states for revenue losses for five years and could be wound down after that, he pointed out, as opposed to the alternative of imposing higher GST rates to ensure that the central exchequer has enough in its own kitty to compensate loss-making States.
“Two issues have been raised about the rates’ structure and the cess proposal on GST, with some people having said there are too many rates,” Mr. Panagariya said. He added that analysts who felt the gains expected to accrue from the new indirect tax regime would be lost with multiple tax rates, have ‘overstated’ the problem without understanding the historical context of India’s indirect tax reforms.
“Till 1999, there were about 11 rates of excise duty – which Yashwant Sinha as Finance Minister modified to three rates – 8 per cent, 16 per cent and 24 per cent. Since then, the rates have changed a lot and we again have multiple tax rates,” he pointed out.
“A lot of people have identified GST as a single tax rate across commodities, when the larger part of the gain is having a single rate on any given product across the nation. If we do a single tax rate of say, 16 or 18 per cent, some rates will have to be raised very far up,” Mr. Panagariya said, highlighting the ‘inflation implications for those commodities that go from low rates to 16 per cent in one go.’ On the contrary, moving some goods from four per cent and others from eight per cent to a standard six per cent rate would not only moderate the inflation impact but also reduce the prospects of revenue loss.
“It’s more predictable. These are things that haven’t been picked up properly and most analysts haven’t thought through the historical background or the problems of adopting a single rate in one go,” Mr. Panagariya said. If the government were to opt for a straightforward GST regime without a cess, the tax rate would have to be much higher as 42 per cent of revenue is devolved to the states, to whom the Centre has committed to compensate for revenue losses in the first five years of GST implementation.
“100 per cent of the cess proceeds will go to the Centre and the advantage of cess is it’s supposed to be temporary. If it is imposed for the specific purpose of compensating the states, then it will be dropped after five years and you will get a lower rate,” he said. Source – http://www.thehindu.com [27-10-2016]
Time for Tamil Nadu government to pore over proposed GST rates
The GST Council, a panel of Union and state finance ministers, has met three times till now. Though consensus has been the mode of decision-making, the process will not be smooth in the days to come. Very important decisions like tax rates, mobilising revenue to give compensation to states and division of tax administrative powers between the Union and the state governments will see tough negotiations and prolonged discussion.
The Centre has proposed a four-slab tax rate structure-two standard rates of 12% and 18% for items like consumer durables, 6% on essential items and 26% on luxury goods. It also proposes 40% sin tax on tobacco products like cigarettes and pan masala. Services under GST will be taxed at 18%. Fewer than 100 items have been exempted from GST. While proposing the GST rates, Union finance minister Arun Jaitley said, “The principles of fixing the rate would be that they should be inflation neutral, and states and Centre continue with their expenditures and taxpayers are not burdened.”
Now Tamil Nadu should compare the revenue generated from each commodity with the likely revenue from GST under the relevant tax slabs. Under GST, the states get the power to tax production, which is under excise duty till now, and also get the power to tax services, while substantially losing sales tax on commodities. Though the Union government claims to have proposed GST rates that will not increase inflation, the reduction in the number of goods to be exempted from tax, as well as the higher minimum rate may be inflationary. For instance, the 6% minimum rate may increase prices of food items.
Behavioural changes in consumers would be key since there is a psychological impact of GST. For example, gold jewellery is currently attracting 10% customs duty, 4% excise duty and 2% sales tax VAT. The cumulative effect of all these taxes is higher compared to the proposed GST rate of 6%, with the Union government proposing to reduce customs duty to 2%. In the existing system, the customers of the gold jewellery see a bill that shows 1% or 2% sales tax (1% in TN) and they are blissfully ignorant of the impact of customs duty and excise duty. If they see a 6% GST, it may impact their buying decision even though the price may not have changed. Will there be more unbilled transactions then?
For the purpose of compensating state’s revenue losses, it appears the states have agreed that the actual commercial tax revenue collected in 2016-17 will be the base and an annual increase of 14% will be assumed. Suppose ‘100 is the commercial tax revenue collected in 2016-17, then ‘116 ought to be the tax revenue collection in 2017-18 and any shortfall from `116 will be compensated by the Union government.
To compensate states like Tamil Nadu which are likely to see a fall in tax revenue due to GST, the Union government also proposes a cess on luxury and sin items to collect additional revenue for distribution to these states.But, given consumption patterns in Tamil Nadu, the state may see more consumption of luxury and sin items.This would mean customers within Tamil Nadu would be bearing the burden of the revenue loss of the state due to GST.
States like Tamil Nadu should therefore carefully calculate the incidence of luxury and sin taxes and the cess thereon, to take a decision in this regard. The ideal proposition, in this case, would be to argue that the Union government should give compensation from its general revenue and there should not be a specific cess on GST for this.
After the latest GST Council meeting held on October 17-19, Tamil Nadu has come back with lots of homework to be done. It should not only study the impact of the GST tax structure on revenue collection, but also the impact of cess. Further, we should also thrash out the division of tax administration powers between the Union and state governments so that the taxpayers are not harassed by two tax authorities at the same time. The Tamil Nadu government should get control over manufacturers and traders over whom it can exercise more effective supervision.
The final point is, it is impossible to a priori calculate the revenue loss or possible gain from the GST. It is only with real-time data analysis that we could estimate the revenue potential of GST and chalk out a strategy to improve revenue collection if needed. Having accepted that taxing ultimate consumption is the least market-distorting and fair system of commodity taxation, GST should come in. The Union and state governments have their work cut out so the system is rolled out on April 1, 2017. Source – timesofindia.indiatimes.com [27-10-2016]