By Tarunkumar G. Singhal
Raman Jokhakar
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The Arvind Subramanian panel has done well to recommend a moderate standard goods and services tax (GST) rate of 17-18%, and also scrap the 1% inter-state sales tax. The rate, worked out after excluding real estate, electricity, alcohol and petroleum products, is higher than the 12% GST recommended by the 13th Finance Commission task force, whose model had exempted nothing. GST would eliminate the cascade of multiple taxes that products bear now and allow manufacturers to claim credit for the taxes paid on inputs across the value chain, creating a built-in incentive to pay tax and thus widen the tax base. It is welcome that the panel has pegged the average GST rate at which existing indirect tax revenues, excluding import duties, would be recouped, the so-called revenue neutral rate, at 15-15.5%.
Other rates—lower rates of 2-6% on precious metals, a 12% rate, and the highest rate of 40% for luxury cars, aerated water, tobacco and tobacco products—are fine. Multiple rates are not inimical to GST.
They have worked in the EU where the value-added tax rates vary across member countries. Instead of a composite 40% excise duty on non-merit goods, what would be desirable is a combination of GST at the standard rate and a ‘sin’ tax component not eligible for input tax credit. This will keep the GST chain unbroken while earning extra revenue and discouraging ‘sin’ consumption. It is welcome that the panel wants petroleum, electricity, real estate and alcohol to be included in GST. Subsuming all taxes and keeping exemptions to the minimum, is the way to go.
Scrapping the 1% inter-state sales tax on which the buyer cannot claim input tax credit is rational. This indirectly accepts one Congress condition for cooperating on GST. The panel, however, is not in favour of specifying a cap on the GST rate in the Constitution, another key Congress demand. However, there is a logic to having a cap.
Without a cap, the states can ratchet up the rate using their constitutional right, and defeat the GST reform’s goal of creating an efficient indirect tax structure.
