4-tier GST rate may lead to classification disputes: NIPFP economist

Imposition of cess without provision for input tax credit will result in cascading of taxes

The four-tier GST rate structure will open up floodgates of classification disputes with a tendency among businesses to demand lower rate for their goods or services, says a research paper.

Four tax rates have been proposed under the Goods and Services Tax regime that is to introduced later this year.

"Present discussion on two standard GST rates (12 per cent and 18 per cent), a lower rate (5 per cent) and a higher rate (28 per cent) in addition to exemptions will make the design of GST complicated and increase the cost of compliance as well as cost of tax administration," said NIPFP associate professor Sacchidananda Mukherjee.

"It is expected that, if accepted, the proposal will open up floodgates of classification disputes and there will always be a tendency among businesses to demand lower rate for their good or service," he said in the paper posted on NIPFP website.

Voices are being raised already to put plantation crops, labour intensive manufacturing, infrastructure inputs and air fares under lower tax bracket, he said.

"It is expected that the higher the differences among the tax rates the larger will be the scope for litigation. The benefits of removal of cascading of taxes will be balanced by a higher cost of compliance, as a result the expected benefits of the introduction of GST may not be achieved," Mukherjee noted.

The National Institute of Public Finance and Policy (NIPFP) economist pointed out that there is a discussion in the GST Council that there will be a separate cess on demerit goods and environmentally harmful goods.

"The objective behind the imposition of cess is to generate revenue to compensate the states on account of any revenue loss due to the introduction of GST during first five years of implementation of GST. It is not clear whether the cess will be imposed with a sunset clause or it will continue as an additional source of revenue for the Central Government," Mukherjee said.

The imposition of cess without provision for input tax credit (like Swachh Bharat Cess) will result in cascading of taxes and it will go against the fundamental advantage of introducing GST, he added.

"Earlier, opposition parties in the Parliament opposed the imposition of 1 per cent additional CST-type tax on inter-state movement of goods, as it would have resulted in substantial cascading of taxes.

"It is expected that the proposal to levy cess will receive similar opposition in the Parliament when the recommendations of the Council are taken up for approval," Mukherjee said.

Last month, Centre and states had reached consensus on GST rollout from July 1, 2017.