Introduction of GST is an important step in the direction of much awaited tax reforms. With the passage of the Constitution Amendment Bill, 2014 for in May, 2015, Government is now all set to implement Goods and Services Tax (GST) by April 2016, subject to the Bill being passed by the Upper House of Parliament. GST is expected to be a comprehensive tax, covering most goods and services with minimum exemptions and will replace the indirect taxes levied by the Central and State Governments.
Once GST is introduced, Central taxes like Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD), and the State level, taxes like VAT/Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax and Luxury Tax, etc. would be eliminated.
For the business, GST is expected to be the game changer by simplifying the indirect tax regime, reforming the Tax Structure, enabling seamless transfer of input tax credit from one state to another in the chain of value addition, reducing incidence of tax, simplifying tax computation & Compliance and making tax administration much easier. GST is also expected to be conducive to development of a common national market and spurring economic growth.
From the point of view of Consumers, perhaps the greatest advantage is expected in terms of an overall reduction in taxes by reducing the cascading effect of taxes on the cost of goods & services and making the goods & services more competitive.
However, whether these expectations will come true will be decided by the future events that will unfold with the enactment of GST legislation, prescribed rate of tax and procedural aspects for availing seamless input credit. Of these, rate of GST will perhaps be the single most important factor.
Taxation under GST regime:
A crucial factor in GST regime is the rate at which the goods & services are to be taxed. A sub-committee comprising central and state government officials appointed by the Government has recommended that the Goods & Services be taxed at a rate of tax which will be a revenue-neutral rate for the Government. Another important aspect is whether there will be a single rate of tax for goods & services or whether the goods & services will be taxed at different rates. In case a single rate of tax is adopted, it may be a lower rate.
The ultimate decision making for GST rate & exemptions vests with the GST Council, comprising of the Union Finance Minister, the Minister of State (Revenue) and the State Finance Ministers.
What is Revenue Neutral Rate (RNR)
Ordinarily, under the GST regime, revenue of the government would have got affected due to several features of GST such as: Input Tax Credits & removal of cascading effect of taxes but would have been compensated by a broader base & increased compliance. Government, while implementing GST, wants to make sure that there is no reduction in quantum of its tax revenue. Therefore an adjusted tax rate is being contemplated to avoid any reduction in revenue of the government. This adjusted rate of tax is the rate which will ensure that Government revenue remains the same as being realized under present tax structure. This rate is what has come to be known as “Revenue Neutral Rate”.
Is the Revenue Neutral Rate really neutral?
For determining what should be the Revenue Neutral Rate, the National Institute of Public Finance & Policy had undertaken a study on Revenue Implications of GST and Estimation of Revenue Neutral Rate. NIPFP has recommended that GST rate should be same as the combined central and state taxes on Goods at present but it should be lower than the combined central and state taxes on services.
It is learnt that the sub-committee comprising central and state government officials had recommended a revenue-neutral rate (RNR) of about 27% under the proposed GST regime.
At present, the average rate of Excise duty is 12 per cent and average VAT rate is about 12.5%. The combined tax rate works out to 24.5%. Then, there are purchase taxes in some states and a central sales tax of two per cent on inter-state movement of goods. The tax rate of 27% seems to have been arrived at based on these factors.
But this logic disregards the fact that Input Tax Credits are allowed in VAT & Excise Duty in most cases. Then there are also exemptions and negative lists in these tax levies. Both these factors ought to have been taken in to account. A GST rate as high as 27% would erode the confidence of business and consumers and may directly affect compliance. The rate of GST needs to be much lower than what is recommended, even from the point of view of being really revenue neutral.
GST Rates globally:
According to the KPMG International Cooperative’s Corporate and Indirect Tax Rate Survey, 2014, covering 132 countries across the globe, Aruba has the lowest indirect tax rate of 1.5% and the highest rate of GST currently prevalent is at 27% in Hungary,. The survey also reveals that the 10 lowest indirect taxes range from 1.5% to 14% and the 10 highest tax rates range from 18% to 27%, where Hungary is the only country with 27% tax rate. Among our Asian neighbors Pakistan, Bangla Desh & Sri Lanka have indirect tax rates of 17%, 15% & 12% respectively.
Adopting a rate of 27% will undoubtedly place India on the highest tax pedestal in the global scenario, alongside only Hungary.
Global experience of transition to GST:
It has been seen that countries which started on the road to GST with a relatively lower rate of tax but with a broad base covering almost all goods & services have had a successful transition to GST. For example, New Zealand implemented a GST in 1986 with a rate of 10% on a broad base consisting of virtually all goods and services and gradually hiked it to the present 15%. Similarly, Singapore GST rate was 3% at inception, which has now been raised to 7%.
Taking clue from the global experience, Government should not be guided by the Revenue Neutral Rate while fixing the GST Rate but should go in for a more moderate rate of GST with a broader base of product & services with minimum exemptions and better tax compliance. Such a regime would be easier to implement and will also find favor with the consumers. Inclusion of products like Liquor & petroleum products, presently planned to be kept out of GST regime, would help in lowering the threshold GST rate significantly because of their very large volume. A lower GST rate of say 20% would also be justified on the grounds that the Service tax portion which is presently 14% would also go up by 6%, contributing significantly to increased revenue of government from GST.