On GST, Centre must reach out to states to settle differences
October, 29th 2016
Will the GST era begin on April 1 2017? A lot will depend upon the outcome of the deliberations at the GST Council meetings scheduled for the first half of November. There are three crucial issues on which consensus has to be reached before we can take up the model law to be passed by the Parliament and state assemblies.
One, the GST rate structure. We are yet to start discussing the rates. We have moved away from the rather futile debate on the revenue neutral rate, the estimates of which range from 12 per cent to 24 per cent. Instead, now the approach is to start from an approximate structure of rates, say, 6 per cent, 12 per cent, 18 per cent and 26 per cent. All the existing commodities will be distributed to each of the above rates on the basis of the proximity of the existing combined burden of current Central and state taxes. This data will enable the estimation of potential tax revenue of the Centre and the state and the rates may be tweaked to arrive at a structure which would ensure revenue neutral receipts.
The most controversial is the upper rate of 26 per cent. The commodities included in the higher bracket currently suffer 14.5 per cent VAT and it makes no sense to reduce the SGST to 13 per cent. Besides, these commodities suffer Central excise duty of 16 per cent and above; commodities such as SUVs attract excise rate as high as 34 per cent. There are other taxes currently subsumed under the GST such as octroi, entry tax, cesses and service tax. Besides, one has also got to account for the cascading impact of tax prevalent in the existing system.
The logic of reducing the tax incidence on consumer durables and demerit goods to 26 per cent makes the GST severely regressive. It may also be noted that around 200 commodities that suffer no Central excise currently but have only lower VAT rate of 5 per cent are proposed to be included in the lower bracket of 6 per cent. The present rate structure raises tax on necessities and reduces the tax on luxuries. The distributional impact of the proposed structure is not acceptable to the states.
The chief economic adviser’s report had recommended the demerit goods rate of 40 per cent. It should be reintroduced in the structure and the states should be given flexibility in determining the demerit goods. The attempt of Kerala to introduce a fat tax on a few branded food products had initiated widespread debate on the efficacy of the move. It will be a retrogressive step if the fat tax has to be given up with the introduction of the GST. Besides, the upper rate of 26 per cent must be raised to at least 30 per cent. It should enable us to reduce the tax rate on necessities so that the GST rate structure is rendered more progressive.
How will the resources required for compensating the states be mobilised? The current thinking of the Central government is to impose a cess on tobacco, pan masala and some of the upper rated commodities such as aerated drinks. Now the secret is out. The upper rate has been pegged at a lower rate so that the Central government has the option to impose the cess as and when necessary — of course, with the concurrence of the GST Council. This is not acceptable to the states. They are being deprived of their legitimate revenue so that compensation can be mobilised by the Centre.
It may be remembered that when the VAT was introduced in 2005, the then Union finance minister, P. Chidambaram, had proposed an additional cess of 1 per cent on the VAT rate. It was not agreed to by the states. The Centre was forced to find a compensation amount from its other elastic sources.
The Centre today still has direct taxes, customs and income from the sale of assets like spectrum or borrowing from which it can easily draw the required resources. The only cess the states were willing to concede was the additional tax on tobacco and the clean environment cess on coal which the Centre was constitutionally entitled to impose. The estimated compensation was only Rs 50,000 crore of which over Rs 43,000 crore would be met by the above two taxes. It was only a matter of Rs 7,000 crore that stood in the way of a consensus at the GST Council.
Finally, there is the vexed question of the role of the states and the Centre in administering the GST. In the first GST Council, deliberations moved to an agreement where the services would be handled by the Centre, the GST on goods below Rs 1.5 crore turnover would be in the domain of the states and those above Rs 1.5 crore turnover concurrently by the state and the Union.
We had objected to composite dealers active on goods and services, the dealers in services in deemed goods such as works contract and the new service entrants being included to the Centre’s net. But, now all these conclusions has been thrown overboard by the new data that has been made available.
The raising of the threshold limit from Rs Rs 10 to Rs 20 crore has resulted in the removal of 33 lakh proportion of goods taxpayers from the state administration. Besides, the Centre is getting access to 12 lakh dealers from the VAT net. With services and IGST entirely with the Centre, the Central government`s 40,000 workforce gains more dealers than states with five times more workforce than the Centre. The so-called conclusion reached in the first Council meeting has been abandoned by all states.
If the Central government adopts a more flexible stand, it should be possible to thrash out the differences and move towards the target date for the implementation of the GST. States are gripped with the fear of losing their financial autonomy after deletion of entry 54 and 62 from the constitution.
That fear has to be assuaged by reinforcing the commitment on the part of the Centre by agreeing to the states’ request of a vertical split up of service tax administration so that goods and services up to Rs 1.5 crore would be in the domain of states and anything above would be administered simultaneously by the Centre and the states.