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GST Council mulls four rate slabs and 14% revenue growth assumed for States

Bimal Jain 
on 20 October 2016

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“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 taxpay.” Shri. Arun Jaitley, Hon’ble Finance Minister

Moving swiftly on the road to formalising the biggest reform of the indirect tax regime, the Goods and Services Tax (“GST”) Council on October 18, 2016 began its three-day meeting and the first day itself saw important progress being made towards the Centre and the States reaching to an agreement on the formula for compensation under GST and also initiated discussions on the GST rate structure.

Compensation to States under GST: 14% revenue growth assumed for States

In order to compute the States’ revenues losses from GST, a 14% annual growth over the 2015-16 base would be assumed in their VAT revenue over the next five years, when the Centre will be obliged to fully compensate them for the losses, if any because implementation of GST. The broad contours of the compensation formula finalised here by the GST Council adds to the revenue base of the 11 geographically disadvantaged States what they forewent to run the area-based excise relief schemes, which cost them Rs. 19,000 crore in 2015-16, but not in case of other States. Also, the CST revenue in the base year with the actual rate of 2% will be added to the revenue base, and not 4% as initially demanded by the States.

Finance Minister, Shri. Arun Jaitley said the 14% secular rate of growth was agreed on after discussing five different formulas to compute the States’ possible VAT revenue growth in a non-GST scenario (any shortfall from this level is eligible to be compensated). The average VAT revenue growth in the five years to 2015-16 was 14.2%, while the five formulas discussed produced a broad range of 10-18%.

Centre proposes four-tier rate structure with standard rates under GST

At the same meeting, the Central government proposed a four-rate structure for GST with two standard rates of 12% and 18%, keen to ensure minimal impact of the new levy on prices and revenue. But some States called for a higher rate on luxury goods.

The Centre's proposal to the GST Council entails a lower rate of 4% for precious metals, a threshold rate of 6%, two standard rates of 12% and 18%, a higher rate of 26% and a cess on luxury items, pan masala and tobacco products. Services will be taxed at 12% and 18% under this dispensation. Most services would be taxed at 18% but those that have abatement will face a levy of 12%.

"At least five alternative options on rate structure have been presented to the council, "the Finance Minister Arun Jaitley told reporters after the day-long session. He elaborated on the guiding rule for the new tax. “The broad approach is that the rate structure should be such that it does not lead to any further CPI (consumer price index) inflation and the states have adequate revenue, so should the Centre, in order to discharge their obligations and this has to be blended with only the least possible burden that has to be put on the taxpayer, "he said.

Revenue Secretary, Shri. Hasmukh Adhia said the proposed rate structure takes into account the existing tax incidence on goods and the Centre was keen that goods that do not face any tax or face lower tax suddenly don't face a higher rate, hurting consumers. Some goods such as consumer durables that face a higher tax rate of 31% now, including Central levies and State taxes, could be moved to the lower bracket of 18% instead of 26%, the highest slab.

“As many as 50% items in the CPI basket would not face  he said. This would keep food and most items of common usage out of tax bracket.”

Earlier, a government panel headed by Chief Economic Advisor, Dr. Arvind Surbamanian, in its Report submitted in December, 2015, has recommended a four-tier rate structure with standard rate of around 17-19%, a 12% rate for essential goods, 2-6% for precious metals and a 40% for demerit goods with Revenue Neutral Rate (“RNR”) of 15%-15.5%.

Cess on ultra-luxury items: Additional resources for Centre

Shri. Arun Jaitley, who also heads the GST Council, said that the model should be such that the Centre has some additional resources that it could use for paying compensation to any State losing revenue. Therefore, additionally, a cess will be levied on ultra-luxury items, tobacco products, pan masala and environmentally harmful products in order to equalise the levy to the current level of tax. This will bring in about Rs. 50,000 crore, which will be used to compensate the States for any revenue loss.

Conclusion:

One of the critical aspect for successful implementation of GST relate to the determination of GST rate, which is revenue neutral i.e. RNR. However, the actual process to determine such rate is not simple and dependent upon many factors like present indirect tax rates, collection of the government from these levies and tax base, etc. Higher the number of exemptions/exclusions of goods and services, narrower will be the tax base and resultantly, RNR would push up to compensate the losses.

For determining taxable person under GST, the GST Council has fixed the threshold limit for GST at Rs. 20 lakhs for all States except North Eastern States including Sikkim wherein the threshold limit will be Rs. 10 lakhs. Thus, the taxable net of GST is quite wide with small threshold limit which inevitably would create wide tax base. But, with such a small threshold limits, the Trade and Industry is expecting that the RNR would likely to go down and the GST rate could be a well balancing act.

Nonetheless, it may not be out of place here to mention that imposition of cesses in GST regime (which would be outside the GST), would hamper the free flow of input tax credit and continue the age old legacy of tax cascading in GST regime as well.

The discussions on the rate structure will now continue today and after an agreement is reached, a technical group of officials will decide the tax slab for each items. A Senior Finance Ministry official 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.

But rift continues to surface between States, as Kerala opposing the structure and rates proposed by the Centre. 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 per cent,” said Kerala Finance Minister Thomas Isaac, adding that the proposal for cess contradicts the original concept paper for GST.

Shri. Arun 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 NDA government is committed to implementing the GST from April 1, 2017, so has set a deadline of finalizing the modalities of the new indirect tax by November 22, 2016. This will help in getting the subsequent GST laws passed during the winter session of Parliament beginning November 16, 2016.

Source: Economic Times, The Hindu Business Line, Financial Express etc.

OUR GST BOOK (2ND EDITION) RELEASED, TITLED "GST LAW & ANALYSIS - WITH CONCEPTUAL PROCEDURES"

With the blessings of the Almighty God and your best wishes & gratitude, we are pleased to announce release of our book on GST, titled, "GST LAW & ANALYSIS - WITH CONCEPTUAL PROCEDURES" (2nd Edition), covering detailed commentary on Model GST Law and Draft Business Processes along with FAQs & practical illustrations/ diagrams/ flowcharts of various aspects of GST in respective chapters of the book along with DVD containing PPT on Model GST Law, Videos on various aspects of Model GST Law, Draft Rules on Registration, Payment, Invoice, Return and Refund, etc.

Further, the Book extensively discusses likely rates under GST, factors affecting RNR and the impact of GST rates on goods and services separately. GST rates on goods and services will impact the current pricing patterns of the entities and thus, analysis has to be made with precision.

Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the authors nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this document nor for any actions taken in reliance thereon.

Readers are advised to consult the professional for understanding applicability of this newsletter in the respective scenarios. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. No part of this document should be distributed or copied (except for personal, non-commercial use) without our written permission.


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