CEA Panel for Removing Tax on Inter-State Trade

Suggests standard goods and services tax rate in the range of 16.9-18.9%

A panel headed by Chief Economic Adviser Arvind Subramanian has recommended the one per cent tax proposed to be levied on the goods and services tax (GST) on inter-state trade of goods to help manufacturing states be done away with. This is one of the major demands of the Congress and the recommendation could help the government break the GST gridlock in Parliament.

In a report to Finance Minister Arun Jaitley on Friday, the committee recommended the main or standard GST rate be in the range of 16.9-18.9 per cent. It prefers it to be between 16.9 per cent and 17.7 per cent. The standard rate will apply to most goods and services in the new indirect tax regime. These rates were calculated by excluding real estate, electricity, alcohol and petroleum products.

OTHER KEY RECOMMENDATIONS OF SUBRAMANIAN PANEL

16.9-18.9% is the standard rate, to be applicable on most goods and services 12% to be the lower rate 40% to be the highest rate, to be imposed on demerit goods such as alcohol 15-15.5% to be the revenue-neutral rate

The panel also recommended other rates, with the lower rate for goods at 12 per cent and the highest rate at 40 per cent. The highest rate is for demerit goods such as alcohol, luxury cars, tobacco, etc.

The panel recommended the rate on precious metals in the range of two per cent to six per cent. As this rate increases, the main GST rate should come down.

The panel said petroleum, alcohol, real estate and electricity should be brought under GST early on. According to the Constitution amendment Bill on GST, petroleum will be kept out till the proposed GST Council can decide on it. Alcohol and a few other items are to be kept out of GST, according to the Bill. This was another demand of the Congress. However, the panel advocated against putting any rate in the Constitution amendment Bill, in contrast to what the Congress wants. The party wants an 18 per cent cap on GST to be prescribed in the Constitution amendment Bill.     

However, the panel said, "The credibility of the macroeconomic system as a whole is undermined by constitutionalising a tax rate or a tax exemption."

The Subramanian committee estimated the revenue-neutral rate of the GST at 15 per cent. This is the rate at which the states and the Centre will not lose or gain revenue after the GST is applied.

The 1 per cent tax was proposed in the constitution amendment Bill to bring manufacturing states like Gujarat, Maharashtra and Tamil Nadu on board. Succumbing to criticism that this would distort the GST, a Rajya Sabha select committee recommended confining the rate to only inter-state trade and not branch transfers from one company to another within a group.

However, the Congress submitted a dissent note, wanting the rate to be withdrawn completely. Subramanian, too, had criticised the proposed levy. "Think of a good (product) going from Gujarat to Tamil Nadu, crossing four states. The good would embody an additional tax of about four per cent to five per cent, because it is one per cent for every state. That might make it easier to import into Tamil Nadu from Bangkok," he had said.

The tax had the potential to undermine Make in India, he had said, adding, "That is why we need to look at this provision carefully. This period that we have gained, some of these issues need to be looked at again."

Briefing reporters later, Subramanian said allocation of the standard rate between the Centre and states would be decided by the GST Council. The council will be set up after the constitution amendment Bill is passed by Parliament and approved by at least 15 of 29 states.

The council will be made up of the Union finance minister and state finance ministers, with one-third power with the former and two-thirds with the latter. Any decision can be taken with the three-fourths of members present and voting.

Revenue Secretary Hasmukh Adhia said the final decision on the rate could only come from the policy choice that the GST Council made for the rate structure and exemption limits.

Minister of State for Finance Jayant Sinha said the report will go to the GST council and then important policy decisions will have to be made on some of the parameters.

Earlier, a sub-committee of the empowered committee of state finance ministers had suggested a revenue-neutral GST rate of almost 27 per cent. While the state GST component was proposed to be 13.91 per cent, the central component was to be 12.77 per cent. The committee had also proposed a narrow band for the state GST component.

However, this rate was considered to be too high. Jaitley has assured Parliament that the GST rate will be significantly lower than this. Various experts in their suggestions to the select panel of the Rajya Sabha had suggested that the GST rate should be within 20 per cent. The Congress wants the rate to be within 18 per cent, with the cap mentioned in the Constitution.

The GST will subsume state value-added taxes and central excise and services tax besides local levies. At present, the states impose VAT at four per cent and 12.5 per cent. Many states have increased their lower VAT rate to five per cent and upper VAT rate to 13 per cent. The Centre levies excise and service tax at 14 per cent each.

Economic affairs secretary Shaktikanta Das said, "The report has been submitted. The department of revenue and finance ministry will go through it and put it into consultation with state governments, through mutual consultation between the state and Centre, through the empowered committee."

Reference - http://www.business-standard.com/article/economy-policy/cea-panel-for-removing-tax-on-inter-state-trade-115120400945_1.html