Fixing Rate of Tax can be a Big Problem in GST

The most violent criticism of the NDA Govt., headed by Shri Narendra Modi, had been that in two years of its functioning, he has not made any big bang economic reforms. The passage of the Constitution (122nd amendment) Bill by the Rajya Sabha on 3rd August, 2016 blunts this criticism and ushers in a historic change in the field of taxation relating to Indirect Taxes. This is hailed as the most significant important step on the lines of economic reforms introduced by the UPA Govt. in the year 1991.

Why the Constitutional amendment needed?

2. The Constitution provides for clear division of powers in respect of taxation between Centre and states. While the Centre at present does not have the right to tax sale of goods, except in the case of inter-state sale, states cannot levy tax on services. The divisions are mentioned in the Article 246 under the Seventh Schedule of the Constitution.

2.1 The Constitution needs to be amended to provide for giving power to both the Centre and states in respect of GST, a single tax on goods and services. Therefore, the very first provision of the Bill is to add Article 246A after Article 246. It says Parliament and the legislature of every state will have the power to make laws with respect to goods and services tax imposition by the Union or by such state. In the case of inter-state supply of goods or services or both, only Parliament will have the power.

Benefits from GST law

3. There have been jubilation all around in support of the Constitutional amendment, which when GST Act is enacted, lead to one nation one tax, one common market, lower rate of tax because of avoidance of cascading effect, simplified tax structure, subsuming of nearly 17 taxes into one single tax, boost to investment via cheaper capital goods, manufacturing to become competitive, higher tax revenue owing to lesser tax evasion, wider tax-base, lower costs in tax collections and compliance, lower logistics, protection from cheaper imports, transparency in working, input tax credits to incentivize suppliers to pay taxes, online trading will provide greater freedom, provide impetus to 'Make in India' campaign, lift GDP and various other such benefits.

Many levels to cross

4. However, these benefits will enure only by crossing of large number of stages – the passing of constitutional amendment, being the first stage, though most important one, which held further progress concerning GST law for nearly a decade, which stands crossed. Before the law becomes a reality, many more levels have to be passed through such as:-

* The Constitutional amendment, after it has been assented to by the Parliament, will have to be ratified by 50% of States.

* The next important step, to be taken, is the constitution of GST Council.

* The Council will have to give recommendation on model GST laws, GST rate(s), etc.

* Union Cabinet will have to approve Central GST & Integrated GST and States will have to give approval to State's GST laws. Thus, what will emerge after such exercises is not one GST law, but a set of 38 taxes – 29 State Taxes (SGSTs), 7 Union Territories taxes, one Central GST (CGST) and one Integrated GST (IGST).

* The GST law, as formulated by the Central Cabinet and IGST, will need to be passed by the Union Parliament. State and UTs GST will need passage by the respective legislatures.

* After the GST Acts (supra) have been enacted, the respective Govts. will need to frame Rules for carrying out such Acts.

* IT infrastructure will have to be created for various laws of the Centre, the States and the UTs.

* Testing of the infrastructure will have to be done by January-March, 2017

* Officers of the Central, State Govts. and UTs (approx 60,000 to 70,000) will have to be trained preferably by Dec-2016.

* Outreach and sensitization for trade and industry will also need to be done, preferably by March, 2017.

The Central Govt. proposes to bring into effect GST laws from 1st April, 2017. The task is formidable. One can wish good speed in this regard.

4.1 Many other challenges

5. There would be many other challenges, to be faced. The two important, amongst these, are (i) fixation of tax rate; and (ii) constitution of GST Council and its efficient and orderly functioning. In the discussion to follow, the problem of rate fixation is being considered.

What would be rate of tax under gst

6. Fixation of GST rate

The issue regarding rate fixation could be considered under two broad heads namely –

[a] Principles, to be kept in view while fixing the rate;

[b] Fixation of actual rate, to be adopted.

These aspects are considered in later discussion.

[a] Principles, to be kept in view

 The rate, to be fixed for GST, need to be 'Revenue Neutral Rate' (RNR) – a rate, which will not result in loss of revenue to Centre and states. This will need consideration of the following aspects:-

* The tax should not be a burden on the consumers;

* It should not undermine the simplicity of GST regime;

* Compliance required should be easy; and;

* The impact on tax revenue should be minimal.

[b] Fixation of the actual rate

The issues, that need consideration in this context, are:-

[i] Whether there should be slabs or merely a single rate

There seems to be a favourable inclination towards slab system on the following lines:-

* Essential commodities should be taxed at lower rate;

* Luxury goods, to be taxed at (sin) higher rate;

* In between, there could be a standard rate for most of the goods.

Arvind Subramanian's recommendation concerning GST rate

7. The Arvind Subramanian committee has raised different scenario and given a range of 16.9%-18.9%. Its final recommendations are: "Meanwhile, we recommend a three-rate structure. In order to ensure that the standard rate is kept close to the RNR, the maximum possible tax base should be taxed at the standard rate. The committee would recommend that lower rates be kept around 12% (Centre plus states) with standard rates varying between 17% and 18%". This 18% has got stuck with the chief economic adviser, the FM said in a lighter vein. There is one reason for that. Most of the analysis, for instance, on inflation rate, is based on the 18% standard rate. He has recommended 40% tax on luxury goods and zero percent for essentials.

Examination of the issue regarding rate fixation

8. FM's view regarding GST rate

Rate has to be finally fixed by the GST Council. The FM's observations on rate, as appearing in the media, read as under:-

"Currently, what the taxpayers are paying is phenomenally much higher. For almost 60-70% of the commodities, on a weighted average are paying 27% plus a large number of other small taxes. Some of the states have even called it 30-32% or more. Now, the guiding principle laid by the empowered committee is that this rate has to come down. It will gradually slide down but even in the first instance, it will come down. This will have to be married with their second intent that the states need enough money for their own developmental activities….. So, a balance between the two will always have to be maintained by the GST Council."

8.1 Suggestions regarding rate(s) have to be examined from a neutral angle. While State FMs had initially said that there should be a significant reduction in the rate, the standard rate could finally be fixed at higher than 18% i.e. as high as 20-22%. Newspaper reports indicate that some states levy 27-28% tax, including VAT, and other levies like entry tax. In this scenario, there could be pressure for fixing the standard rate at 22-23%. The Kerala FM, it is reported, advocated a rate of 22-24% during the meeting of the empowered committee of State FMs on 25th July at Kolkata, which could be repressive for final consumer. The Congress seems to be insisting on 18% rate.

Concluding comments

9. The fixing of rate could be a ticklish point in the exercise relating to GST. It can neither be too high nor too low. High rates could lead to inflation. Too low rate may affect schemes relating to poverty alleviation and development schemes. Thus, by lower rates, public interest could be impacted. Hence, a way will have to be worked out to arrive at a rate, which should be fair and lead to optimum revenue without hurting any interest. This can be well said than done. Already differences seem to have surfaced. Kerala has already pitched up for higher rate. The Tamil Nadu MP walked out of the Parliament at the time of voting. This state may like to have its own rate(s). Thus, the vision of "one country one market one tax rate" may not fortify.

9.1 Slab rates will, obviously, be equitable. One (standard) rate will ensure simplicity. The GSTC will have to take a decision balancing the two aspects.

9.2 In working out the rate(s), regard will have to be taken of the exemptions from the GST in respective legislations. This too may be challenging work.

9.3 The initial work, to be done in the field relating to working out a model GST rate (or slabs), is to be done by the GST Council. According to a survey done by the Times of India, the consensus is that the rate 'should be fixed by the GSTC'. The result of the survey, as published in the paper, is as under:-

In favour of….  

State       GSTC or Parliament

Karnataka     Parliament

UP                     Parliament

Telengana       GSTC

Gujarat               GSTC

Rajasthan       GSTC

Odisha               GSTC

Andhra               GSTC

WB                       GSTC

MP                 Non-committal

Jharkhand Non-committal

9.4 The solution to the problem thus, lies in establishing a well-represented strong GSTC with knowledgeable persons. It should not be loaded with retired people. It should be a mixture of experience with vision. Representations regarding the rate can be made before this Council and the Council's decision could be made binding for two years after which the decision can be reviewed with fresh bouts of representation.