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Which is the best GST rate?

Jaitley has said 27% is too high but states have all said they can't afford to lose revenue and would be wary of anything below 25%

Jayshree P Upadhyay & Indivjal Dhasmana  |  New Delhi 

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Despite the present uncertainty on passage of the constitution amendment Bill in this regard, the debate is really on the goods and services tax (GST) rate, likely to take effect from April next year.

It could, as already reported in this newspaper, be in the range  of 20-23 per cent. That apart, the Centre would need some deft handling to enable states’ wish to protect revenue under the new regime.


Earlier, a sub-panel of  the empowered committee of state finance ministers (EC) had recommended a revenue-neutral rate at 12.77 per cent for the central GST and 13.91 per cent for state GST, nearly 27 per cent combined. This has been referred to the National Institute for Public Finance and Policy (NIPFP), as these were on the revenue estimates of 2011-12. Revenue-neutral rate (RNR) is the rate that allows Centre and states to sustain current revenues from tax collections.

Before this, a task force of the 13th finance commission had suggested a 12 per cent GST rate (five per cent CGST and seven per cent SGST). This is considered too low and the 27 per cent one as too high, the finance ministry has indicated.

“We would have liked to keep the RNR less than 20 per cent but it is not feasible in the near term. In earlier stages of the rollout, we would have to keep a rate between 20 and 23 per cent,” said a ministry official.  

Currently, the Union excise duty rate is 12 per cent on most goods. Value-added tax (VAT) is 12.5 per cent in most states. This combines to 24.5 per cent. Then, there are purchase taxes in some states and a central sales tax of two per cent on inter-state movement of goods. From this point of view, a goods tax at 27 per cent seems too high, since VAT also gives input credit and so does excise duty in most cases. Service tax will be 14 per cent from June and making it 27 per cent would again be too high. Currently, only the Centre can impose service tax.

According to KPMG International Cooperative’s Corporate and Indirect Tax Rate Survey, 2014, a survey of 132 countries showed the highest GST rate was 27 per cent in Hungary and the lowest was 1.5 per cent in Aruba. The 10 highest ranged from 27 per cent to 18 per cent.

However, states fear a revenue loss if the rates are  too low. At the recent EC meeting in Thiruvananthapuram, Kerala Chief Minister Oommen Chandy had said, “The challenge before the committee is to ensure that states do not experience revenue loss in the post GST scenario. As most states are undergoing acute fiscal stress, revenue loss is unthinkable.”

Former CBEC Chairman Sumit Dutt Majumder said: “My sense is that it (GST rate) should be 21 per cent to start with. States are afraid, of what I say is fear of the unknown. But once GST comes into effect and things settle in five-six months, states’ revenues would improve due to efficiency and increased tax base in the system, despite the low rate. I would even say that the tax rate could be lowered.”

Vivek Mishra, leader, international tax, PWC India, believes an RNR lower than 25 per cent could lead to revenue loss. “It is hard to quantify the loss as the GST has innumerable variables but the revenue leakage would be substantial. One could have a lower rate if the tax base was wider but that is not the case in India. Just comparing the rate from global standards is not prudent; it requires a deeper analysis. But everything said and done, a rate of 27 per cent would potentially create strong opposition from both consumers and industry,” he said.

Govinda Rao, former director of NIPFP, said a possible way is that whatever RNR is estimated, the Centre assures the states that their losses would be taken care of if, say, the rate was fixed at 20 per cent — half each of CGST and SGST.

Some favour abatement on all services, since the rate on these would almost  double under the new regime. However, states might not agree, as it would lead to a revenue loss for them.

According to the constitution amendment Bill cleared by the Lok Sabha recently, the Centre would fully compensate states for revenue  loss due to GST for the first three years. It would then taper to 75 per cent in the fourth year and 50 per cent in the fifth.

Besides, one per cent tax would be levied on goods to help the manufacturing states, as GST is destination-based.

In the Lok Sabha, Finance Minister Arun Jaitley had said the rates would be much below 27 per cent. “I straightaway concede that 27 per cent would be very high...after this 27 per cent was born, the states and the Centre have decided to keep alcohol out,” he said.

In July 2010, the government had suggested a standard rate for goods at 20 per cent (10 per cent each for the Centre and the states), a lower rate of goods at 12 per cent (6+6) and 16 per cent (8+8) for services. It proposed to move towards a single-rate GST of 16 per cent in three years.

First Published: Tue, May 12 2015. 00:42 IST
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