CEA-led Panel Suggests GST Rate of 17-18%

A key government committee has suggested a standard goods and services tax (GST) rate of 17-18%, increasing chances of a consensus on the key reform so that the constitutional amendment that it entails can get passed in the current winter session as the clock ticks down to the April 1 deadline. The standard rate, typically that at which most goods and services will be taxed, is based on a revenue-neutral rate of 15-15.5% as suggested by the committee headed by Chief Economic Advisor Arvind Subramanian.
“The submission of the report is one more step in the direction of our administrative preparedness to implement GST,“ Economic Affairs Secretary Shaktikanta Das said. “The finance ministry will go through the report as also will state governments. We all know that GST will add to the GDP of the country ,“ said Das. The government wants to launch GST on April 1, 2016. The committee that presented its findings on Friday has suggested a two-rate structure, while calling for a unified one in the medium term -a concessional rate of around 12% for goods that need to be taxed at low rates and the standard rate of 17-18%. It has also recommended a steep 40% “sin demerit“ rate for luxury cars, aerated beverages, paan masala, tobacco and tobacco products.
The committee said this structure will have minimal inflationary consequences. “Facilitating easy implementation and taxpayer compliance at an early stage -via low rates and without adding to inflationary pressures -will be critical,“ it said.
Subramanian said GST was a critical reform initiative. “The country has a historic opportunity with GST. It will strengthen the country's tax institutions, get rid of barriers within states and create a common market,“ he told reporters after submitting the committee's report.
Tax experts and industry welcomed the recommendations.
The committee's recommendation is in line with the views of the opposition Congress party , which has called for a GST rate of 18%.This will help ease Prime Minister Narendra Modi's efforts to reach an accommodation with Congress and improve the prospects of a parliamentary accord, without which rolling out GST will be impossible.
The committee has also backed the Congress demand for dropping the proposed 1% levy on inter-state sales. It has, however, rejected the demand that the rates be written into the Constitution. This is something the Congress has sought. “The credibility of the macroeconomic system as a whole is undermined by constitutionalising a tax rate or a tax exemption. Setting a tax rate or an exemptions policy in stone for all time, regardless of the circumstances that will arise in future, of the macroeconomic conditions, and of national priorities may not be credible or effective in the medium term,“ it said.
As a compromise, the government favours including any cap in the GST law instead that can be more easily amended if needed. GST has been stuck because of Congress' opposition in the Rajya Sabha, where the ruling National Democratic Alliance does not have a majority .
The rates have not factored any buoyancy in growth from the levy , which according to some estimates may lift GDP by as much as two percentage points. Real estate and alcohol have also been kept out of the calculations. The committee's proposals are recommendatory . The GST Council, comprising representatives of the Centre and the states, will have the authority to set the rates.
If more goods are kept at the lower rate, then the standard rate will need to go up to ensure there is no revenue loss. The lower rate is meant for those items that are in the nature of public goods or targeted at deprived sections. The rates suggested are national rates, comprising the sum of central and state GST rates, and will have to be allocated between the Centre and states by the GST Council.