As the first day of its meeting concluded on Tuesday, the GST Council managed to arrive at a consensus on how to compensate the states for the losses they incur on account of the tax reform that subsumes various state and central levies.
However, the council has not yet arrived at a conclusion on the crucial GST rate structure. According to finance minister Arun Jaitley who briefed reporters, the proposal for a four-tier structure was discussed.
Consensus on compensation for states
This is definitely good news. The Council has decided on the issue of compensation for states. “One main issue in today’s (Tuesday) agenda was to calculate the compensation for states and this matter was concluded in the discussions held,” Jaitley told reporters.
The base year for calculating the compensation is 2015-16. One of the basis for calculating revenue in the first five years, which is the compensation period, will be the secular rate of growth in revenue. This has been arrived at as 14 percent, which would be treated as a possible growth rate. The Centre has promised to compensate the states for revenue losses for the first five years after the implementation of the GST if the states’ revenues come down under the new tax regime.
Commenting on the development, MS Mani, senior director – Indirect Tax, Deloitte Haskins & Sells LLP, said, “Now that consensus has been reached on the revenue compensation and the base year, states can focus more on the steps required to enable GST in each state, including stakeholders consultation.”
The basic structure: The Centre on Tuesday proposed a four-slab GST tax structure – 6 percent for essential goods, 12 percent for merit goods, 18 percent standard rate and 26 percent for demerit goods. However, there is also a proposal to impose an additional cess.
Food items will continue to be exempt from tax. As much as 50 percent of the common use goods will either be in the exempt category or lower band. Also, 70 percent of the items is proposed to be governed by 18 percent of lower GST rate. However, ultra-luxury items such as high-end cars and demerit goods like tobacco, cigarettes, aerated drinks, luxury car and polluting items would attract an additional cess on top of the 26 percent GST rate.
On gold, the GST rate suggested was 4 percent. FMCG and consumer durable products would attract 26 percent GST rate, against the current incidence of around 31 percent.
Taxation of services would, however, be only in the 6 percent, 12 percent and 18 percent range, with the higher rate being 18 percent.
The merits of the structure: The biggest thing could be that inflation is likely to be contained. Remember, one of the concerns many experts have raised with regards to GST implementation has been that the new tax reform may push up inflation rate as services are likely to get a higher tax. A report in The Indian Express, however, says the overall impact on the consumer price index is likely to be (-)0.6 percent. This is the claim made by the Centre at the GST Council meeting on Tuesday.
Estimate of inflation impact on health services is 0.56 percent, fuel and lighting 0.05 percent and clothing 0.23 percent, transport (-)0.65 percent, education (-)0.08 percent and housing (-)0.09 percent, according to the IE report. It also says the Centre’s estimated revenue collection is Rs 8.72 lakh crore as per this structure.
The proposal to impose a cess will help create a fund of Rs 50,000 crore, which can be used to compensate the states. At least that is what the Centre has said.
According to revenue secretary Hasmukh Adhia, the Rs 50,000 crore pool that would be created out of cess on demerit goods would be used to compensate the states for revenue loss. Of that, Rs 26,000 crore is expected to be garnered from clean energy cess and the remaining from tobacco and their items.
The demerits of the proposal: First of all, will the Congress agree to this kind of structure? The party has been arguing for capping the GST standard rate at 18 percent, which it says is the “appropriate rate”. With the new structure proposal capping the rate at 26 percent and also adding a cess on top of it, this is unlikely to pass the muster.
The cess is already attracting opposition
A report in the Mint newspaper says the meeting today is likely to start off on a wrong note.
“It is likely to emerge as a key point of disagreement between the centre and the states as the latter have always opposed levy of central cesses that are excluded from the divisible pool of taxes,” the report says.
Not just politicians, experts also feel this is likely to add to the tax burden. Bipin Sapra, tax partner, EY, says, “The maximum rate of 26% for demerit or luxury goods may harbour more goods than initially envisaged which will make them costlier. Also since cesses would be outside the GST, the present cascading may continue raising the tax burden.”
Kerala’s Thomas Issac has also told PTI that his state wanted the highest rate to be fixed at 30 percent so that common man’s use of daily items can either be exempt or levied with lower rates.
Reacting to the proposal, the Federation of Indian Chambers of Commerce and Industry (Ficci) suggested that to check inflation and the tendency to evade taxes “the merit rate should be lower and the standard rate reasonable”.
“As per the current indications and reports, goods will be categorised as being subject to merit rates (12 per cent), standard rates (18 per cent) and de-merit rates (40 per cent),” FICCI said in a release following a meeting in New Delhi with the Empowered Committee of State Finance Ministers.
Given the likely sharp differences that are emerging, it is very unlikely that a final decision on rate will be taken today. Already, Jaitley has said there are five proposals on the table. Given the diverse problems each states face with the GST, an early resolution is doubtful.