One of the crucial issue for successful implementation of GST relates to the determination of the GST rate. Since the GST is primarily intended as an exercise in reforming the consumption tax in India and not an exercise for additional resource mobilisation through discretionary changes, the CGST and SGST rates should be such rates which would yield the same revenue as collected from the various taxes which will be subsumed in the CGST and SGST (hereafter such rates shall be referred to as 'revenue neutral rates' or 'RNR').
The RNR for the CGST and the SGST is determined in accordance with the formula-
RNR = (R X 100) / B
RNR: Revenue Neutral Rate for the Centre or the States as the case may be;
R: Collection from the Central or State taxes, as the case may be, which are proposed to be subsumed in the CGST and SGST;
B: Estimated Tax base of the GST
[A] WHAT WILL BE THE ESTIMATED TAX BASE FOR GST?
The Tax Base for GST will depends on the following factors:
• Exempted goods and Services : Currently, there are exemptions available to many goods under the various Vat Acts and there is also concept of declared goods under Central Sales Tax. Whether these exemptions and concept of declared goods will continue under GST is not clear.
• Goods which are outside the purview of GST : The government has introduced the GST Constitutional 122nd Amendment Bill 2014. The Amendments proposed in the Bill gives some indication of the sectors/ products which will be covered under GST. Like Alcoholic liquor for human consumption, Electricity Duty, Stamp Duty. Property Tax etc. has been keep outside GST and will continue as it is. Further, petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel will be covered under GST from the date to be notified by the GST council.
• Transactions which are below the prescribed thresholds: Till date the government is not able to arrive at consensus for the threshold. Currently, under Excise it is Rs 1.50 Crores, under Service Tax it is Rs 10 lacs and under various Vat Act, it ranges from Rs 5 lacs to Rs 20 lacs.
Thus unless the government has clarified the above, the exact tax base which will be liable to GST can’t be estimated. Consequently, determination of GST rate will be herculean task.
[B] WHAT WILL BE RATE STRUCTURE UNDER GST?
As per the First Discussion Paper released by The Empowered Committee, it has been decided to adopt a two-rate structure -a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. For upholding of special needs of each State as well as a balanced approach to federal flexibility, and also for facilitating the introduction of GST, it is being discussed whether the exempted list under VAT regime including Goods of Local Importance may be retained in the exempted list under State GST in the initial years. It is also being discussed whether the Government of India may adopt, to begin with, a similar approach towards exempted list under the CGST.
The States are of the view that for CGST relating to goods, the Government of India may also have a two-rate structure, with conformity in the levels of rate under the SGST. For taxation of services, there may be a single rate for both CGST and SGST.
[C] WHAT WILL BE THE GST RATE?
Task Force Report
Given the estimate of the GST Base and the level of central taxes which are intended to be subsumed in the GST, the task force report on GST of Thirteenth Finance Commission (“here in after referred as Task Force Report) estimates the RNR for the CGST at 5.0 percent. Similarly, the RNR in respect of the state level taxes which are proposed to be subsumed in the SGST is estimated to be 6.0 percent. Therefore, the combined RNR is estimated to be 11 percent.
However, in order to provide for an alternate buoyant source of revenue to the third-tier of Government. The rate of CGST and SGST on all non-SIN goods is recommended by Task Force at the single rate of 5 percent and 7 percent, respectively.
For SIN goods comprising of emission fuels, tobacco products and alcohol, both the Central government and the State government may continue to levy taxes as at present, in addition to CGST and SGST.
The empowered committee of state finance ministers has virtually trashed the Thirteenth Finance Commission task force’s Goods and Services Tax (GST) report. They question the methodology applied by the committee to arrive at the 12 per cent revenue neutral rate.
“The states have expressed reservations on the methodology and the approach of the taskforce. It (the rate suggested by the taskforce) does not tally with the estimates made by the government, the National Institute of Public Finance and Policy, and the states. We will like them to review the methodology,” said Committee Chairperson and West Bengal Finance Minister Asim Dasgupta. This brings out the divide between the tax experts and the political class on the GST structure.
The Constitution (122nd Amendment), Bill, 2014
a. Floor rates with bands of goods and services tax: As per the Bill, the proposed GST council shall make recommendations to the Union and the States on:
• the rates including floor rates with bands of goods and services tax;
• any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster.
On floor rate the Ministry have stated that GST Council may decide to make recommendations about the floor rate or a band within which tax rates may be kept depending upon the discussions in its meeting. The proposed amendment will allow such flexibility. However, the Ministry of Finance on floor rate/band stated that a high level of harmonization helps in minimizing the aberrations in the implementation of the GST. Dispersal in rates across various States compromises the objectives of a single common market significantly. The matter becomes even more complex if such variation in rates is permitted in the case of services. Services, being intangible, are difficult to be related to geographical locations and pose significant challenges in deciding the precise place where they are liable to be taxed. If the autonomy is permitted only in respect of goods, (and not services), it leads to different problems of distinguishing between goods and services, which is not easy in a modern economy where such distinctions are withering away fast. Moreover, variations in rates across States lead to arbitrage opportunities, resulting in evasion and distortion in production and supply chain. Thus the benefits of keeping harmonized structure far outweigh the desire to provide unrestricted autonomy.
On floor rates, Dr. Parthasarathi Shome, Director & Chief Executive, Indian Council & Research on International Economic Relations stated that states should be allowed to have floor rates under SGST allowing them to move up the rate if they wished. The reason presumably is that some advanced economies do this. It is important to keep India‘s SGST rate structure as simple as possible. The states have performed this task well so far under their VAT structure where they essentially have one general rate and one lower rate, with a list of goods of local importance from which they can select about a dozen commodities to exempt to suit local conditions. There is no reason why they should sacrifice under the SGST the uniformity that they have already achieved under the VAT. Otherwise, in practice, the SGST would become unmanageable; and administration and monitoring of interstate trade may become untenable.
b. Additional Tax @ 1% on supply of goods in the course of inter-state trade or commerce
As per Constitutional (122nd Amendment) Bill, 2014, the Central government will levy an additional tax on supply of goods, not exceeding one percent in the course of inter-State trade or commerce. This additional tax will be collected by the Government of India for a period of two years, and assigned to the States from where the supply originates. Recently, the Select Committee of Rajya Sabha known to be suggesting that this additional @ 1% tax on inter-state supply of goods should be confined to inter-state movement of goods for consideration only.
Sub Penal of Empowered Committee
Recommended the revenue neutral rate 27% (SGST 13.91% and CGST 12.77%). This has been referred to the National Institute for Public Finance and Policy (NIPFP), as these were on the revenue estimates of 2011-12.
A Select Committee of Rajya Sabha (which is examining the GST Constitutional 122nd Amendment Bill 2014) has observed that Standard GST rate should be within 20%, while the lower one should not cross 14%. It also suggested that the proposed GST council may opt for a broad based and moderate rate as the high rate will surely erode the confidence of the consumer badly and may lead to high inflation. In its dissent note the Congress wanted the GST rate to be within 18%.
It should be noted here that the committee did not recommended any specific rate but made an observation: ‘To start with, India’s GST rate should not go beyond 20% for the Standard rate , and perhaps 14% for the reduced rate.
Earlier, a sub-panel of the Empowered Committee had recommended an RNR of around 27 per cent, to be broken into state GST of 13.91 per cent, and the central GST of 12.77 per cent. A committee, headed by Chief Economic Advisor Arvind Subramanian, is looking into the issue, and is expected to submit its report soon.
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By: CA. Chitresh Gupta
B. Com(H), FCA, IFRS (Certified), IDT (Certified)
Author of Book "An Insight into Goods & Service Tax"
Managing Partner , M/s Chitresh Gupta & Associates