3 min read.Updated: 27 Jul 2016, 03:55 AM ISTRemya Nair
State finance ministers reiterated their commitment to protecting interests of the people by reducing the tax burden while safeguarding their states' revenues
New Delhi: The goods and services tax (GST), whenever it comes into force, could end up being higher than 18%, with state governments rejecting the rate proposed by a panel led by chief economic adviser Arvind Subramanian.
At the same time, the states reiterated their commitment to protecting the interests of the people by reducing the tax burden while safeguarding their own revenues, at a meeting of the empowered committee of state finance ministers in New Delhi on Tuesday.
GST, which will subsume a range of existing levies, is aimed at dismantling inter-state barriers to trade in goods and services, effectively leading to the creation of a common market in India.
The bill, which has been cleared by the Lok Sabha, is due to be introduced in the current monsoon session in the Rajya Sabha, where the ruling National Democratic Alliance (NDA) lacks a majority.
There were some points of agreement between the centre and the states at Tuesday’s meeting, but a full consensus proved elusive.
Union finance minister Arun Jaitley assured states that the wordings in the constitution amendment bill will be reworded to reflect the centre’s promise to compensate them in full for any loss of revenue in the first five years after GST takes effect.
States are also on board on dropping a proposed additional 1% tax on supply of goods; this will also be a part of the bill.
States also unanimously opposed capping of tax rates in the constitution amendment bill, isolating the Congress which has insisted on this.
Consensus on dual control, however, is still pending with the states demanding that traders with revenue of less than ₹ 1.5 crore should be exclusively under their control.
“The wording (for tax rate under GST) has been worked out. The incidence of tax on the common man has to be significantly reduced. At the same time, there need to be safeguards for protecting the revenue of the states," said Amit Mitra, West Bengal finance minister, who is also the head of the empowered committee of state finance ministers.
A consensus over the revenue-neutral rate (RNR), or the tax rate at which there will be no revenue loss to the states under a GST regime, proved elusive. The states expressed concern over the wide divergence in the RNR proposed by the government panel led by Subramanian and the report commissioned by states and submitted by New Delhi-based think tank National Institute of Public Finance and Policy (NIPFP).
The standard rates proposed by the Subramanian panel are below 18%, while those proposed by NIPFP are above 26%.
“All states were of the view that the tax rates put forward by the chief economic adviser are not acceptable. There was no consensus on what should be the rate. It can be 18% or above that. That was the consensus," said Kerala finance minister Thomas Isaac, adding that the states prefer to keep rates on items of mass consumption low. “We know that the effective rate on consumer products today is about 30%. It will be considerably brought down. At what level, we will decide later," he said.
“The general consensus has been to drop this concept of RNR rate. We will ensure a rate and structure which will reduce the effective tax burden on the common man and also that this rate and structure will protect the existing revenues of the Union and the states," he added.
The tax rates under GST will be decided by the GST council, comprising the Union finance minister and state finance ministers, which will be formed once the constitution amendment bill is passed by the Rajya Sabha.
The states also reiterated their rigid stance on dual control of small traders, keen to protect themselves against a potential backlash from these traders who form a majority of the taxpayer base.
“Small traders with revenue of upto ₹ 1.5 crore should not suffer from dual control of state and centre. States have been administering them and will continue to administer them. It was an absolute consensus among state finance ministers and has been conveyed to the Union finance minister. It has to be resolved for GST to happen," said Mitra. “Traders with revenue of above ₹ 1.5 crore can be administered by both the centre and the states," he said, effectively dismissing the centre’s proposal of evolving a mechanism where both the states and the centre could administer small traders.
Bipin Sapra, tax partner at EY, said the entire goods and services industry is looking for single control.
“The small-scale industry does not have the wherewithal to handle two level of scrutiny. So a single control for traders having a revenue below ₹ 1.5 crore is welcome," he said, adding that a low tax rate is crucial for GST’s success.
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