The long-awaited meeting of the Empowered Committee of State Finance Ministers (EC) was recently held in Delhi and, as was perhaps expected, the EC has come out with a recommendation on what can legitimately be called a Dual Rated Dual GST System. There were expectations in certain quarters that the dual GST would be a single rated one at the Federal and the State level for both goods and services.

This has not been possible and the EC has now come out with a dual rate model for goods. There has been no mention of whether there will be a dual rate for services as well but the understanding and expectation is that services will be taxed at just the one rate, at the Federal and State levels respectively. This article discusses the dual rate dual GST model for goods in some detail.

As it appears, the States have agreed to two basic rates for the State GST comprising a standard rate for most goods and a lower one for essential commodities. In addition, a special rate will apply to a small list of preci-ous metals. A consensus to this effect was apparently arrived at after prolonged deliberations at the EC meeting. The exact State GST rates as also the lists of goods which will be charged to the stand-ard rate and those which will be charged to the lower rate have not yet been agreed, it seems.

However, the standard rate is likely to be in the range of 8 per cent to 9 per cent and will apply to a majority of the goods. For essential commodities, the rate could be in the range of 4 per cent to 5 per cent. It is also anticipated that the special rate for precious metals will be fixed at 1 per cent.

In addition to the above, it has been announced that certain products will be exempt from GST and further that the States will be given a degree of flexibility with regard to the choice of goods of local importance for the purpose of exempting them from the GST.

From the above, it appears that while the above State GST model is understood as a dual rated one for goods, if one were to count the several rates that are likely, there may actually be four different rates.

While these are the rates that are likely for the State GST, the expectation is that a similar set of rates will apply to these categories of products at the Central level as well. In other words, the idea is for a particular category of goods to be taxed to two GST rates, one at the Central level and the other at the State level, as per the dual GST model, and for each of the two taxes to be the same for that particular category of products. Thus, general goods will be taxed at 8 per cent, say, at the Central and State Level, thus resulting in an aggregate GST of 16 per cent on such goods. A similar situation will obtain for essential commodities as well.

It is also understood that petroleum products, tobacco and alcohol will not be brou-ght within the GST regime.

Apparently the reason for this exclusion appears to be that these product categories are currently taxed at very high rates by the States. Moreover, the present VAT and other levies on these products also vary across the States. We will hence possibly have a situation of coexistence of VAT and the State GST in regard to the above goods unless these goods are brought within the GST at the present very high levels. This appears very unlikely though.

Given the above dual rate model for the GST, it would be important to have a robust mechanism to ensure strict adherence to the above rates, considering the recent unha-ppy experience of States deviating from the agree rates of 4 per cent and 12.50 per cent for most goods under the prevent VAT regime.

It was also anticipated that a particular product would attract the same GST rates across the States. However, by giving flexibility to the States for certain goods of local importance to be granted exemption from the State GST, there could be a possibility that the same product may be taxable in one State and exempt in another, thereby resulting in different rates for these products across States. This is clearly undesirable but it appears that States have demanded and obtained this right.

It is a moot point that multiple tax rates typically lead to classification disputes. India has been witness to huge litigation in this regard and it will not be in the interests of the country if this experience is repeated in the GST regime as well. One key aspect to be considered in this regard is the uniformity of classification of goods across States.

In fact, the Harmonised System of Nomenclature (HSN), which is an international standard adopted by most of the countries for categorisation of goods in order to facilitate international cross border trade, can be used as a basis to classify goods under the dual GST as well.

Moreover, the list of exempted products should be minimised in order to ensure that there is no incentive to misclassify goods in order to avail the exemption. It is hoped that adequate good sense will prevail so as to ensure that rate proliferation is not once again a problem, as is currently being faced in the present VAT regime.

The EC is meeting the Finance Minister on October 8 in order to possibly discuss and agree the GST rates for both the Central and the State GST, across the product categories in order that the model of the dual rated dual GST is finally agreed so that it is thereafter rolled out by April 1, 2010.