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Of all the controversies
surrounding the game-changer design of GST, none is as fundamental as the one
about the GST rates. A common feature of the successful models of GST in other
countries is a single and low rate of tax at the time of its introduction. Japan
and Singapore introduced their GST at 3 per cent, and New Zealand and Australia
at 10 per cent.
The GST rate in India need not be outside this range. A rate of 10 per cent or
less would be sufficient to replace the Centre and state revenues under the
current system, and create room for further growth through higher rates in
future. It would encourage voluntary compliance and obviate the need for
exemptions or lower rates for essential commodities. This would mean simpler tax
design, elimination of classification disputes, and lower compliance costs — a
win-win for taxpayers and governments.
If the rate does prove to be inadequate, it could be increased later, based on
actual revenue performance.
While both the Centre and the states agree that the GST rates have to be
revenue-neutral, views diverge as to the level of those rates. The GST task
force of the Thirteenth Finance Commission estimated the revenue-neutral rate to
be five per cent for the Centre and six per cent for states, if applied to a
comprehensive base of all items in the consumer basket. (The task force had
recommended a higher state GST rate of seven per cent, to accommodate revenues
need of municipal and local governments.)
These rates were based on the assumption that GST would replace all the domestic
indirect taxes, other than those on petroleum, alcohol and tobacco. If the stamp
duty and levies on vehicles, goods and passenger transportation, and
electricity, were not to be subsumed under GST (as the states have argued), the
revenue-neutral state GST rate is reduced to 3.8 per cent, for a combined Centre
and state rate of less than nine per cent.
The task force calculations have attracted some controversy. Both the Centre and
the states fear these rates might not be adequate to replace their revenues.
While they have not proposed any specific alternative rates, suggestions have
been made for a combined tax rate in the range of 16-18 per cent.
Such a high rate would seriously compromise the simplicity and efficiency of the
GST design. They would create a vicious circle of base erosion through
exemptions and multiple rates, increased complexity, and lower compliance — all
leading to yet higher rates to meet the revenue goals.
Overall, the higher rate may yield no more revenues than the lower rate.
Ironically, this could be taken as vindication of the skeptics of the lower
rate.
The task force has computed the GST base through several alternative methods,
which yield similar results. The method which appears to be the most robust is
the one based on the sales and purchases actually reported by the universe of
2.85 million businesses on their income tax returns filed electronically for
2007-08, yielding a GST base of Rs 30.7 lakh crore. Given the tendency for
under-reporting of income, this would be a conservative estimate of the base.
Further, any resulting upward bias in the calculations is more than offset by
the task force not making any allowance for the gains from improved compliance
and higher GDP.
Some states are concerned that even if a single uniform rate is revenue-neutral
in aggregate for all the states, it might not be for each of them individually.
There would be states with losses and gains. If the gains/losses are modest and
temporary, they could be addressed by the assurance provided by Finance Minister
Pranab Mukherjee to compensate the states for revenue losses in the initial
years. However, if they are significant and enduring, one could consider
increasing the Centre GST rate by, say, one percentage point, and earmark the
incremental revenues to a special fund to provide compensation to the states for
any shortfall in their revenues. This would preserve inter-state uniformity of
the GST rate, while at the same time ensuring that no state suffers a revenue
loss from GST.
Source: Business Standard, India, dated
25/05/2010
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