Panel bats for flat 12% GST rate

Panel bats for flat 12% GST rate

New Delhi: In a significant win for the Union government, the 13th Finance Commission (TFC) has endorsed its proposal for a single goods and services tax (GST) and recommended a “revenue-neutral" rate of 12%.

“If you subsume everything, 12% seems a viable rate," said D.K. Srivastava, director of Madras School of Economics who was a member of the previous finance commission.

“Twelve per cent is a welcome break based presumably on completely broadbasing the tax base and having a single rate," said S. Madhavan, executive director, PricewaterhouseCoopers.

The proposal, undertaken by the commission and put up on its website for public discussion on Tuesday, argues that this rate will encourage better compliance, lead to lower prices of goods and services, result in an acceleration in exports and deceleration in imports by providing a level-playing field to Indian companies, and boost India’s annual gross domestic product (GDP) by as much as 1.5 percentage points ($15 billion at the current size of the economy).

As an incentive for states to sign on to its proposal, the commission has recommended the creation of a safety net—a compensation fund with a corpus of Rs30,000 crore to be generated in five years by the Centre.

Any state, which suffers a revenue loss on account of implementation of the “flawless" GST will be fully compensated; and at the end of five years any surplus will be distributed on the basis of the same tax sharing formula prescribed by TFC.

The recommendations come on the eve of a meeting of state finance ministers to finalize rates for GST. Last weekend, West Bengal finance minister Asim Dasgupta said the states would finalize the rates in 15 days.

“This (TFC’s proposal) can serve as a benchmark for negotiations," Srivastava said.

Also See Key features of a diluted version of “Flawless GST" (Graphics)

It is to be seen whether the state governments will be influenced sufficiently to give up their demand for a dual GST, where states have suggested three rates for goods and also recommended leaving some goods out of the tax net altogether.

The finance commission is a constitutional body and recommends distribution of tax revenues between the Union and the state governments as well as among the states.

TFC is chaired by Vijay Kelkar and is due to submit its recommendations on sharing of tax revenues by 31 December. One of its terms of reference was to study the impact of GST on the country’s growth and international trade.

GST, which was supposed to be operational from 1 April, is to replace the myriad set of Centre, state and local-level levies with one single rate for both goods as well as services. The transition to GST will entail an amendment to the Constitution that will empower state governments, but also at the same time take away their present powers to tax since it will now be subsumed into one national rate. The uniformity of the rate across the country would economically unify the country.

Key elements of the proposal, which TFC referred to as the “flawless" model, are that GST should be based on “consumption" and hence not distinguish between raw materials and capital goods in permitting input tax credit; extend to all goods and services; restrict exemption only to services such as those provided by Central, state and local governments, and education and health services provided by non-governmental organizations. It has also proposed subsuming of most taxes including taxes on vehicles and taxes/duties on electricity.

In a potential game changer, TFC has also recommended integrating the real estate sector into the GST framework. This is to be achieved by subsuming the stamp duty on immovable properties levied by the states to facilitate input credit and eliminate a cascading impact. It would also be extended to all new commercial and residential properties and to transactions of immovable properties in the secondary market.

To discourage consumption of the so-called “sin goods", TFC has recommended an excise levy over and above the GST on items such as alcohol, emission fuels and tobacco products. No input credit would be permitted on the additional excise.

“Many countries are moving to a system where higher rates can be charged on polluting inputs and outputs, where manufacturers are not given input credit," Srivastava said.

This principle brings about fairness in a destination-based tax such as GST where goods might be consumed far from the manufacturing centres which bear the brunt of the pollution, he said.

The introduction of GST is billed as the single biggest tax reform initiative—a culmination of the incremental tax reforms that commenced with the publication of the Long-Term Fiscal Policy in 1985. The move to a value-added tax, both at the Centre and state level, was a key incremental step.

Graphics by Sanceep Bhatnagar/Mint