Panel proposes single-rate mechanism

Report suggested that area-based exemptions should be withdrawn

The Thirteenth Finance Commission has suggested a single positive goods and services tax (GST) rate on all goods and services while advocating that no exemptions should be allowed except for a common list applicable to states and the Centre.

This list should only comprise unprocessed food items and public services provided by all government departments excluding railways, communications, public sector enterprises, service transactions between an employer and employee and health and education services, the commission suggested.

It has also said that transmission fuels, diesel, petrol and aviation turbine fuel should be brought under a dual levy — of GST and an additional levy — with no input tax credit available on the additional levy. This would protect the existing revenues from these sources.

The report suggested that area-based exemptions should be withdrawn and the tax paid reimbursed wherever necessary. Inter-state transactions should be treated through a mechanism which permits sellers in one state to charge state GST from buyers in another.

However, in the case of certain high value goods comprising gold, silver and platinum ornaments, precious stones and bullion, the dealers may, subject to the threshold limit of Rs 10 lakh but without the ceiling of Rs 40 lakh, also be allowed to opt for the composition scheme.

The report has said that GST should be levied on consumption and computed on the basis of the invoice credit method. At the same time, all major indirect taxes (excluding Customs), cesses and surcharges should be subsumed into the central and state GST.

However, all other petroleum products and natural gas should be brought within the ambit of GST. The sumptuary goods of tobacco and alcohol should be taxed through GST as well as an additional levy, with no input tax credit being provided on the additional levy.

The entire transportation sector should be included in the GST base, and taxes on vehicles, goods and passengers should be subsumed into GST. Similarly, the power sector should be included in the tax base and electricity duty subsumed, the report suggested.

The real estate sector (both residential and commercial) should be included in the tax base and stamp duty levied by state governments should be subsumed into GST. A threshold of Rs 10 lakh in this regard will permit exemption of small residential and business properties. The entire financial services sector should be brought under the GST tax base. Capital goods should be treated like all other goods and services, and a corresponding liability for GST on subsequent sale, the commission said.

The commission also recommended that the Centre and states should conclude a ‘grand bargain’ to implement the model GST. At the same time, it suggested that the state governments should be given a sanction of Rs 50,000 crore to compensate their claims of revenue losses between 2010-11 and 2014-15 on implementation of GST.

The unspent balances in this pool would be distributed among all the states on January 1, 2015, according to the ‘devolution’ formula.

The commission has suggested that the empowered committee (EC) of state finance ministers should be transformed into a statutory council. The compensation should be disbursed in quarterly instalments on the basis of recommendations by a three-member Compensation Committee comprising the Union revenue secretary, secretary to the EC and an eminent person with experience in public finance, said the commission headed by Vijay Kelkar.

In the unlikely event that a consensus with regard to implementing all the elements of the ‘grand bargain’ cannot be achieved and the GST mechanism finally adopted is different from the model GST suggested by the commission, the amount of Rs 50,000 crore shall not be disbursed.

The GST tax base has been estimated at Rs 31,25,325 crore. This is the average of five different estimations of the tax base obtained by following as many approaches.