The Centre and the States on Tuesday reached an agreement on the formula for compensation under the goods and services tax (GST). They also initiated discussions on the rate structure. The consensus could trigger a 14 per cent growth rate in revenue on the base year of 2015-16.
The Centre proposed a four-slab rate structure ranging from zero to 26 per cent at a meeting of the GST Council on Tuesday, Revenue Secretary Hasmukh Adhia said. The meeting would continue on Wednesday. After an agreement is reached, a technical group of officials will decide the tax slab for each item. Adhia said the rationale behind the proposed rate structure is to ensure that the tax incidence is not higher than the existing rates of excise, value added tax and other levies.
The structure proposes the GST at 0 per cent on a host of goods and services, including food, health and education services, and at 26 percent on luxury items, such as fast-moving consumer goods and consumer durables. On consumption of ultra-luxury items and demerit goods, such as big cars and tobacco products, it proposes imposition of cess over and above a 26 per cent GST rate. The GST is proposed to be levied at 6 per cent, 12 per cent or 18 per cent on the remaining goods and services.
This proposal singles out gold, for which it proposes a GST rate of 4 per cent, Adhia said. “The principle for determining the rate on each item being proposed is to levy and collect the GST at the rate slab closest to the current tax incidence on it,” he added.
The rate proposed on all items is by and large lower than the current rate. In the 26 per cent slab, for instance, currently most goods are being taxed at about 27 to 31 per cent, he pointed out.
However, he said a cess will be levied on ultra-luxury items, tobacco products and pan masala and environmentally harmful products to equalise the levy to the current level of tax. This will bring in about ₹50,000 crore, which will be used to compensate the States for any revenue loss.
The proposal retains only the Clean Environment Cess from the multitude currently in place, with the GST subsuming all the others, including the Swachh Bharat Cess, the Krishi Kalyan Cess and the Education Cess.
Adhia explained that the proposal envisages 10 percent of the current tax revenue collections base to fall in the 6 percent GST slab and about 70 percent in the 12 per cent and 18 per cent slabs. About 25 percent of the current tax revenue base falls in the proposed 26 per cent slab, including items that will attract cess.
The GST Council is likely to finalise the GST rate structure on Wednesday, Union Finance Minister Arun Jaitley informed the media at the conclusion of the Council’s deliberations on the first day. “At least five alternatives for possible rate structures for the GST were presented to the Council today…discussions will continue tomorrow,” he said.
“The objective is that the rate structure should not lead to any further retail inflation. The Centre and the States should have adequate revenue and it should also put the least possible burden on the taxpayer,” said Finance Minister Arun Jaitley at the end of the first day of the Council meeting, adding that there are five options given to States for the rate structure under GST.
However, some states held a different view on the rate structure. “Worst fears confirmed — GST to be regressive. Tax on luxuries to be reduced to 26 per cent and on necessities to be raised to 12 percent,” said Kerala Finance Minister Thomas Isaac, adding that the proposal for cess contradicts the original concept paper for GST.
Jaitley said the issue of cross empowerment of the Centre and State tax officials on the existing 11 lakh service tax assessees will be taken up after a decision on rates.
The Council reached a consensus that compensation to States for any revenue loss would be limited to the taxes subsumed under GST. Input tax credit given for intra-state transfers would be included in the definition of revenue, Jaitley said.
Further, the notional tax revenue arising out of exemptions to the North East and Hill States would also be included in revenue.