Highlights of the Executive
Summary of the Report of the Committee
headed by the Chief Economic Adviser Dr.Arvind Subramanian on Possible Tax
rates under GST
CA Rubneet Kaur
(Report submitted to the Finance Minister; On the
Revenue Neutral Rate (RNR), the Committee recommends the same in the range
between 15 percent and 15.5 percent (Centre and states combined) with a
preference for the lower end of that range)
At the outset, following
are the important points explained in the report-
1.
The term
revenue neutral rate (RNR) will refer to that single rate, which preserves
revenue at desired (current) levels
2.
The RNR should
be distinguished from the “standard” rate defined as that rate in a GST regime
which is applied to all goods and services whose taxation is not explicitly
specified.
3.
On the
RNR, the Committee’s view is that the range should between 15 percent and 15.5
percent (Centre and states combined)
4. The Committee would recommend that lower rates be kept around 12 per
cent (Centre plus states) with standard rates varying between 17 and 18 per
cent.
5. Demerit rates—other than for alcohol and petroleum (for the states) and
tobacco and petroleum (for the Centre)—will have to be provided for within the
structure of the GST.
6.
The Committee recommends
that this sin/demerit rate be fixed at
about 40 percent (Centre plus states) and apply to luxury cars, aerated
beverages, paan masala, and tobacco and tobacco products (for the states).
7.
If policy
objectives have to be met, instruments other than tax exemptions such as direct
transfers could be deployed
8.
Eliminating all taxes on
inter-state trade (including the 1 percent additional duty) and replacing them
by one GST will be critical to achieving the objective of Make in India
9.
The proposed structure of
tax rates will have minimal inflationary consequences.
10.
. Bringing alcohol and
real estate within the scope of the GST would further the government’s
objectives of improving governance and reducing black money generation without
compromising on states’ fiscal autonomy.
11.
Bringing electricity and
petroleum within the scope of the GST could make Indian manufacturing more
competitive
12.
Eliminating the exemptions
on health and education would make tax policy more consistent with social
policy objectives
Detail is as under
Committee headed by the Chief Economic Adviser Dr.
Arvind Subramanian on Possible Tax rates under GST submitted its
Report to
the Finance Minister here today. The Committee in its concluding observations
has stated that this is a historic opportunity for India to implement a
game-changing tax reform. Domestically, it will help improve governance,
strengthen tax institutions, facilitate “Make in India by Making One India,”
and impart buoyancy to the tax base. It will also set the global standard for a
value-added tax (VAT) in large federal systems in the years to come.
Following are the
highlights of the Executive Summary of the Report submitted today:
The GST has been an initiative that has commanded
broad consensus across the political spectrum. It has also been a model of
cooperative federalism in practice with the Centre and states coming together
as partners in embracing growth and employment-enhancing reforms. It is a
reform that is long awaited and its implementation will validate expectations
of important government actions and effective political will that have, to some
extent, already been “priced in.”
Getting the design of the GST right is, therefore,
critical. Specifically, the GST should aim at tax rates that protect revenue,
simplify administration, encourage compliance, avoid adding to inflationary
pressures, and keep India in the range of countries with reasonable levels of
indirect taxes.
There is first a need to clarify terminology. The
term revenue neutral rate (RNR) will refer to that single rate, which preserves
revenue at desired (current) levels. In practice, there will be a structure of rates,
but for the sake of analytical clarity and precision it is appropriate to think
of the RNR as a single rate. It is a given single rate that gets converted into
a whole rate structure, depending on policy choices about exemptions, what
commodities to charge at a lower rate (if at all), and what to charge at a very
high rate. The RNR should be distinguished from the “standard” rate defined as
that rate in a GST regime which is applied to all goods and services whose
taxation is not explicitly specified. Typically, the majority of the base
(i.e., majority of goods and services) will be taxed at the standard rate,
although this is not always true, and indeed it is not true for the states
under the current regime.
Against this
background, the Committee drew a few important conclusions.
Because identifying the
exact RNR depends on a number of assumptions and imponderables; because,
therefore, this task is as much soft judgement as hard science; and finally
also because the prerogative of deciding the precise numbers will be that of
the future GST Council, this Committee has chosen to recommend a range for the
RNR rather than a specific rate. For the same reason, the Committee has decided
to recommend not one but a few conditional rate structures that depend on
policy choices made on exemptions, and the taxation of certain commodities such
as precious metals.
The summary of
recommended options is provided in the table below.
|
Summary of
Recommended Rate Options (in percent)
|
|||||
|
RNR
|
Rate on
precious metals
|
"Low"
rate (goods)
|
"Standard"
rate
(goods and
services)
|
"High/Demerit"
rateor Non-GST excise (goods)
|
|
|
Preferred
|
15
|
6
|
12
|
16.9
|
40
|
|
|
|
4
|
17.3
|
|
|
|
|
|
2
|
17.7
|
|
|
|
Alternative
|
15.5
|
6
|
12
|
18.0
|
40
|
|
|
|
4
|
18.4
|
|
|
|
|
|
2
|
18.9
|
|
|
All rates are the sum of
rates at center and states
On the RNR, the Committee’s view is that the
range should between 15 percent and 15.5 percent (Centre and states combined)
but with a preference for the lower end of that range based on the analysis in
this report.
On structure, in line with growing
international practice and with a view to facilitating compliance and
administration, India should strive toward a one-rate structure as the
medium-term goal.
Meanwhile, the Committee recommends a
two-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 per cent
(Centre plus states) with standard rates varying between 17 and 18 per cent.
It is now growing international practice to
levy sin/demerit rates—in the form of excises outside the scope of the GST--on
goods and services that create negative externalities for the economy. As
currently envisaged, such demerit rates—other than for alcohol and petroleum
(for the states) and tobacco and petroleum (for the Centre)—will have to be
provided for within the structure of the GST. The foregone flexibility for the
center and the states is balanced by the greater scrutiny that will be required
because such taxes have to be done within the GST context and hence subject to
discussions in the GST Council. Accordingly, the Committee recommends that this
sin/demerit rate be fixed at about 40
percent (Centre plus states) and apply to luxury cars, aerated beverages, paan
masala, and tobacco and tobacco products (for the states).
This historic opportunity of cleaning up the
tax system is necessary in itself but also to support GST rates that facilitate
rather than burden compliance. Choices that the GST Council makes regarding
exemptions/low taxation (for example, on gold and precious metals, and
area-based exemptions) will be critical. The more the exemptions that are
retained the higher will be the standard rate. There is no getting away from a
simple and powerful reality: the broader the scope of exemptions, the less
effective the GST will be. For example, if precious metals continues to enjoy
highly concessional rates, the rest of the economy will have to pay in the form
of higher rates on other goods, including essential ones. As the table shows,
very low rates on precious metals would lead to a high standard rate closer to
20 percent, distorting the economy and adding to inflationary pressures. On the
other hand, moderately higher taxes on precious metals, which would be
consistent with the government’s efforts to wean consumers away from gold,
could lead to a standard rate closer to 17 percent. This example illustrates
that the design of the GST cannot afford to cherry pick—for example, keeping a
low RNR while not limiting exemptions--because that will risk undermining the
objectives of the GST.
The GST also represents a historic
opportunity to rationalize the tax system that is complicated in terms of rates
and structures and has become an “Exemptions Raj,” rife with opportunities for
selectivity and discretion. Tax policy cannot be overly burdened with achieving
industrial, regional, and social policy goals; more targeted instruments should
be found to meet such goals, for example, easing the costs of doing business,
public investment, and direct benefit transfers, respectively; cesses should be
reduced and sparingly used. Another problem with exemptions is that, by
breaking up the value-added chain, they lead in practice to a multiplicity of
rates that is unpredictable, obscured, and distortionary. A rationalization of
exemptions under the GST will complement a similar effort already announced for
corporate taxes, making for a much cleaner overall tax system.
The rationalization of
exemptions is especially salient for the center, where exemptions have
proliferated. Indeed, revenue neutrality for the center can only be achieved if
the base for the center is similar to that of the states (which have fewer
exemptions—90 products versus 300 for the center). If policy objectives have to
be met, instruments other than tax exemptions such as direct transfers could be
deployed.
The Committee’s recommendations on rates
summarized in the table above are all national rates, comprising the sum of
central and state GST rates. How these combined rates are allocated between the
center and states will be determined by the GST Council. This allocation must
reflect the revenue requirements of the Centre and states so that revenues are
protected. For example, a standard rate of 17% would lead to rates at the
Centre and states of say 8 percent and 9 percent, respectively. The Committee
considers that there are sound reasons not to provide for an
administration-complicating “band” of rates, especially given the considerable
flexibility and autonomy that states will preserve under the GST (including the
ability to tax petroleum, alcohol, and other goods and services).
Implementing the GST will lead to some
uncharted waters, especially in relation to services taxation by the states.
Preliminary analysis in this report indicates that there should not be large
shifts in the tax base in moving to the GST, implying that overall compensation
may not be large. Nevertheless, fair, transparent, and credible compensation
will create the conditions for effective implementation by the states and for
engendering trust between the Centre and states; The GST also represents a
historic opportunity to Make in India by Making One India. Eliminating all
taxes on inter-state trade (including the 1 percent additional duty) and
replacing them by one GST will be critical to achieving this objective;
Analysis in the report suggests that the
proposed structure of tax rates will have minimal inflationary consequences.
But careful monitoring and review will be necessary to ensure that implementing
the GST does not create the conditions for anti-competitive behavior;
Complexity and lags in GST implementation
require that any evaluation of the GST—and any consequential decisions—should
not be undertaken over short horizons (say months) but over longer periods say
1–2 years. For example, if six months into implementation, revenues are seen to
be falling a little short, there should not be a hasty decision to raise rates
until such time as it becomes clear that the shortfall is not due to
implementation issues. Facilitating easy implementation and taxpayer compliance
at an early stage—via low rates and without adding to inflationary
pressures--will be critical. In the early stages, if that requires raising
other taxes or countenancing a slightly higher deficit--that would be worth
considering.
Finally, the report has presented detailed
evidence on effective tax burdens on different commodities which highlights
that in some cases they are inconsistent with policy objectives. It would be
advisable at an early stage in the future, and taking account of the experience
of the GST, to consider bringing fully into the scope of the GST commodities
that are proposed to be kept outside, either constitutionally or otherwise.
Bringing alcohol and real estate within the scope of the GST would further the
government’s objectives of improving governance and reducing black money
generation without compromising on states’ fiscal autonomy. Bringing
electricity and petroleum within the scope of the GST could make Indian
manufacturing more competitive; and eliminating the exemptions on health and
education would make tax policy more consistent with social policy objectives.
There is a legitimate concern that policy should not be changed easily
to suit short term ends. But there are enough checks and balances in the
parliamentary system and enough pressures of democratic accountability to
ensure that. Moreover, since tax design is profoundly political and contingent,
it would be unwise to encumber the Constitution with the minutiae of policy
that limits the freedom of the political process in the future: the process
must retain the choice on what to include in/exclude from the GST (for example,
alcohol) and what rates to levy. The credibility of the macroeconomic system as
a whole is undermined by constitutionalising a tax rate or a tax exemption.
Setting a tax rate or an exemptions policy in stone for all time, regardless of
the circumstances that will arise in future, of the macroeconomic conditions,
and of national priorities may not be credible or effective in the medium term.
This is the reason India—and most credible polities around the world--do not
constitutionalise the specifics of tax policy. The GST should be no different.
The nation is on the cusp of executing one of the most ambitious and
remarkable tax reforms in its independent history. Implementing a new tax, encompassing both goods and services, to be implemented by
the Centre, 29 States And 2 Union Territories, in a large and complex federal
system, via a constitutional amendment requiring broad political consensus,
affecting potentially 2-2.5 million tax entities, and marshalling the latest
technology to use and improve tax implementation capability, is perhaps
unprecedented in modern global tax history. The time is ripe to collectively
seize this historic opportunity.
(Source- Press Information Bureau, Govt of India- Ministry of Finance)
CA Rubneet Kaur
B.Com, M.Com, MBA
rubneet@gmail.com
**
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