FC proposes a 12% GST rate     

The 13th Finance Commission has come out with a ‘flawless’ goods & services tax (GST) model, which proposes a single rate of 12% and exempts only three sectors: unprocessed food, school & college education and non-government health services. All businesses with an annual turnover of Rs 10 lakh and above would be brought under the tax net. Tax benefits for special economic zones would go, as these would become redundant in the new regime where exports would be zero-rated.

According to the report of the commission’s task force on GST released on Tuesday and first reported by FE on November 26, the real estate sector would be integrated into the GST framework by subsuming stamp duty on immovable property levied by states. This would facilitate input credit and eliminate the cascading effect of the tax. Real estate transactions now attract only stamp duty at the output level, whereas the output incurs input taxes like Vat on construction material and service tax on specified works contracts.

The new tax, the authors of the report say, would have an economic value of 50% of GDP. It would reduce prices of manufactured goods, make house construction less expensive, but farmers would earn more for their produce.

The GST would have two components —central GST and state GST—levied on a common and identical base of transactions, with no differentiation between goods and services. The combined rate of 12% comprises 5% for central GST and 7% for state GST.

“The revenue neutral rate (RNR) we arrived at was 11%--5% for the Centre and 6% for states--but we decided to propose a higher rate of 7% for states with a provision to transfer the proceeds of 2% to local bodies,” one of the report’s authors told FE. To further allay states’ concerns, the task force also proposed that they be allowed to retain stamp duty (revenues from which were Rs 39,000 crore in 2007-08) in the first year of GST before being phased out in the next three years. Further, the Centre would create a compensation fund with a Rs 6,000-crore outlay each year for five years.

Asserting that states would only gain in revenue, the official said, “We are proposing a Rs 1-lakh crore bonanza to states over their current revenue growth--a 16% increase from RNR would fetch them Rs 31,000 crore, the compensation fund would get them Rs 30,000 crore and the stamp duty proceeds in first year another Rs 39,000 crore or so.” The new GST, which the Task Force wants to implement from October next year, would not take away the autonomy of any tax jurisdiction, except for capricious exercise of discretion. “On the other hand, the right to taxation of both the Centre and states would increase,” said the source.

By turning the tables on the empowered committee of state finance ministers, which has proposed a ‘compromise GST model’, the task force recommended inclusion of all the levies that the state committee wanted outside the GST framework. Besides stamp duty, GST would also subsume state taxes on vehicles, passenger transport, electricity and all cesses and surcharges. Octroi and entry tax would go.

The commission also wants to integrate all existing taxes on petroleum, tobacco and alcohol into the GST network, but proposes a dual levy of GST and excise on these so-called ‘SIN goods’. So, there will be a GST component that offers full input tax credit and an excise component for which no input credit would be available. Financial services would be comprehensively taxed. Inter-state transactions will be effectively zero-rated, which means they won’t be a burden on businesses. “Prices of agricultural goods would increase 0.61-1.18%, whereas overall prices in the manufacturing sector would decline 1.22-2.53%,” said the report. Farmers would benefit as the terms of trade would shift from manufacturing to agriculture by 1.9-3.8%, said the source.