New Delhi: The fate of India’s most ambitious tax reform, the goods and services tax (GST), hangs in balance. Over the next three days, deliberations of the GST council, most of which are expected to be contentious, will determine whether the country can stick to the 1 April deadline for the rollout of the tax.
The agenda before the council includes the vexing issues of the ideal tax rate, evolving the compensation mechanism for states and division of administrative powers between the centre and states on levying service tax.
“Rates are going to be a contentious issue. The Union finance minister will play a key role in managing the consensus,” said a person familiar with the matter.
Clearly, finance minister Arun Jaitley, who was engaged in late-evening confabulations with his team on Monday, will have to manage the trade-off between pragmatic politics and good economics.
Another person familiar with the development said that the rates are being worked out in a way to ensure that the inflationary impact on the common man is the least even while protecting the tax revenues of the states.
This could mean multiple tax rates at which goods are taxed. One could be a single-digit tax rate for goods currently exempted from paying excise duty which will be taxed under GST and another a slightly higher tax rate which will be on all items that are taxed at lower rates at present.
However, the challenge will be to keep the standard rate, or the rate at which most items will be taxed, at around 18%. The council will also have to decide the range of the narrow band within which states can vary the GST rate.
Though the states rejected the recommendations of the panel headed by chief economic adviser Arvind Subramanian on the standard rate, expectations are that the council will eventually agree to a rate of 20%.
The states had expressed concern over the wide divergence in the rates proposed by the government panel led by Subramanian that had recommended rates below 19% and the report commissioned by states and submitted by New Delhi-based think tank National Institute of Public Finance and Policy that had proposed a standard rate of around 23%, Mint reported on 27 July.
Officials expressed caution and said that a final decision is unlikely in the three-day meeting. The first person cited above said the issue of rates is “technical as well as very politically sensitive. It may be difficult to arrive at a final decision in these three days”.
The meeting will also seek common ground on the division of administrative control over service tax assessees. In the previous meeting, a few states had opposed the proposal that the centre will handle all the 1.1 million service tax assesses. The issue of a centralized registration process for services such as banking and telecom is also likely to come up in the meeting, as is that of calculating the annual increase in tax revenues for arriving at a compensation figure for states. The alternatives being discussed are to arrive at a growth rate for revenue projections, or to take into account the revenue for the best three of the past five years.
“Tax rates are the last big issue which needs to be resolved. Though a final decision on the rates looks difficult in this three-day meeting, at least directionally we will get a sense of where the rates are headed,” said Pratik Jain, leader, indirect tax, at PwC India.