Experts feel a higher rate may add to inflationary pressure, hurt services taxed at around 15% now
Policymakers in some quarters of the government favour a goods and services tax rate of around 16% to make the reform more acceptable and also ensure it does not add to inflationary pressures.
The new fiscal framework could provide the government wiggle room so that if revenues take a hit because of the low tax rate, this space could be utilized till the biggest tax reform since Independence starts yielding gains.
“A lower tax rate will ensure that the new tax is readily accepted... It means that there would be no demand and price shock to the economy,“ said a top government official who is aware of the discussion.
“A lower tax rate will ensure that the new tax is readily accepted... It means that there would be no demand and price shock to the economy,“ said a top government official who is aware of the discussion.
This would be closer to the 16.8% average goods and services tax in highincome countries than the 14.4% in emerging economies.
A number of countries including Australia, New Zealand and Canada experienced an increase in prices after GST was implemented, a fact that the government is concerned about.
The finance ministry committee on the revenue neutral rate (RNR) headed by chief economic advisor Arvind Subramanian had pegged this at 1515.5% in its report.
“An RNR in the 15-15.5 % range with a lower rate of 12% and a standard rate of 18% would have negligible inflation impact,“ it had said. “A higher RNR with a lower rate of 12% and a standard rate of 22% would have 0.3-0.7% impact on aggregate inflation.“
A higher goods and services tax rate will impact services, currently taxed at around 15%, the most.
States in any case have to be compensated for any revenue loss by the Centre, so the latter should prod them toward a lower rate, the official, who did not wish to be identified, told ET.
A state finance minister concurred with this view. “States will get their compensation if there is a revenue loss, so it should not be so difficult,“ the minister said, suggesting states will not oppose such a move.
If the rate is kept low then it will not give the impression of levies rising under GST, experts said.
“The current VAT (value added tax) and service tax rates for standard goods and services are not more than 15%,“ said Anita Rastogi, partner, indirect tax, PwC.
“In case GST rates are kept low, say 16%, then optically it will not give an impression that the rate has been increased much under the new tax regime. Also, by now there is a public understanding that GST rates could be around 17% to 18%.
“Hence, there will be a better buy-in from corporates on low GST rates, specially service sector where the current rate is 15%.“
FISCAL ROOM
The official cited above said that the new fiscal framework being formulated by the NK Singh committee will need to factor in GST and any additional compensation that may be needed for states.
A lower rate would also act as a boost to the economy, the official added.
The Centre could rely on other revenue-generation sources such as aggressive disinvestment till the new tax regime stabilizes. He said the rate can be raised once the new tax achieves some stability. “Raising the tax rate would be much easier than reducing it once it's set,“ the official said.
DELIBERATIONS SOON
Sixteen states have ratified the constitutional amendment to roll out goods and services tax, meeting the minimum number for it to be sent to the president for his assent.
Once signed, the GST Council can be set up to take the process forward. The tax rate would be decided by the GST Council that will be chaired by the union finance minister and have the state finance ministers as members.
A committee of officials both from the Centre and the states is readying the groundwork needed for the council to take a call on the rate once it is formed. The council may be formed next week soon after the president's assent.
Industry's preference is for a rate of 18%. Services currently are taxed at about 15% while for goods, the levies add up to 26-32%. There has been some talk of two separate rates one for goods and another for services if the rate decided upon is on the higher side but that isn't ideal.
It would mean that software or works contracts, where the services and goods portions have to taxed separately, will continue to face issues along with increased litigation.
Experts also don't agree with the concept. “One rate for goods and services is critical as it will remove the current issues being faced on characterisation of a particular transaction into goods or services,“ Rastogi said.
The finance ministry committee on the revenue neutral rate (RNR) headed by chief economic advisor Arvind Subramanian had pegged this at 1515.5% in its report.
“An RNR in the 15-15.5 % range with a lower rate of 12% and a standard rate of 18% would have negligible inflation impact,“ it had said. “A higher RNR with a lower rate of 12% and a standard rate of 22% would have 0.3-0.7% impact on aggregate inflation.“
A higher goods and services tax rate will impact services, currently taxed at around 15%, the most.
States in any case have to be compensated for any revenue loss by the Centre, so the latter should prod them toward a lower rate, the official, who did not wish to be identified, told ET.
A state finance minister concurred with this view. “States will get their compensation if there is a revenue loss, so it should not be so difficult,“ the minister said, suggesting states will not oppose such a move.
If the rate is kept low then it will not give the impression of levies rising under GST, experts said.
“The current VAT (value added tax) and service tax rates for standard goods and services are not more than 15%,“ said Anita Rastogi, partner, indirect tax, PwC.
“In case GST rates are kept low, say 16%, then optically it will not give an impression that the rate has been increased much under the new tax regime. Also, by now there is a public understanding that GST rates could be around 17% to 18%.
“Hence, there will be a better buy-in from corporates on low GST rates, specially service sector where the current rate is 15%.“
FISCAL ROOM
The official cited above said that the new fiscal framework being formulated by the NK Singh committee will need to factor in GST and any additional compensation that may be needed for states.
A lower rate would also act as a boost to the economy, the official added.
The Centre could rely on other revenue-generation sources such as aggressive disinvestment till the new tax regime stabilizes. He said the rate can be raised once the new tax achieves some stability. “Raising the tax rate would be much easier than reducing it once it's set,“ the official said.
DELIBERATIONS SOON
Sixteen states have ratified the constitutional amendment to roll out goods and services tax, meeting the minimum number for it to be sent to the president for his assent.
Once signed, the GST Council can be set up to take the process forward. The tax rate would be decided by the GST Council that will be chaired by the union finance minister and have the state finance ministers as members.
A committee of officials both from the Centre and the states is readying the groundwork needed for the council to take a call on the rate once it is formed. The council may be formed next week soon after the president's assent.
Industry's preference is for a rate of 18%. Services currently are taxed at about 15% while for goods, the levies add up to 26-32%. There has been some talk of two separate rates one for goods and another for services if the rate decided upon is on the higher side but that isn't ideal.
It would mean that software or works contracts, where the services and goods portions have to taxed separately, will continue to face issues along with increased litigation.
Experts also don't agree with the concept. “One rate for goods and services is critical as it will remove the current issues being faced on characterisation of a particular transaction into goods or services,“ Rastogi said.
ET VIEW
Settle For A Lower Rate
It makes sense for the Centre and states to settle for a lower GST rate when all taxes charged on goods and services are collapsed into one.Globally, the average rate is about 16.4%. An efficient and seamless crediting of all taxes paid by a manufacturer on inputs used to make the final product will lower retail prices. The Arvind Subramanian panel has forecast that food and beverages would virtually see no price increase, with a standard 18% GST, Centre and states combined. Neither would fuel and light which are important to protect poor consumers.
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