In a significant win for the Union government, the 13th
Finance Commission (TFC) has endorsed its proposal for a single goods and
services tax (GST) and recommended a “revenue-neutral” rate of 12%.
This will be through a concurrent dual levy of 5% by the
Centre and 7% by states—2 percentage points of this will
be earmarked for the third tier of government made up of
panchayats and local bodies.
“If you subsume everything, 12% seems a viable rate,”
said D.K. Srivastava, director of Madras School of
Economics who was a member of the previous finance
commission.
“Twelve per cent is a welcome break based presumably on
completely broadbasing the tax base and having a single
rate,” said S. Madhavan, executive director,
PricewaterhouseCoopers.
The proposal, undertaken by the commission and put up on
its website for public discussion on Tuesday, argues
that this rate will encourage better compliance, lead to
lower prices of goods and services, result in an
acceleration in exports and deceleration in imports by
providing a level-playing field to Indian companies, and
boost India’s annual gross domestic product (GDP) by as
much as 1.5 percentage points ($15 billion at the
current size of the economy).
As an incentive for states to sign on to its proposal,
the commission has recommended the creation of a safety
net—a compensation fund with a corpus of Rs30,000 crore
to be generated in five years by the Centre.
Any state, which suffers a revenue loss on account of
implementation of the “flawless” GST will be fully
compensated; and at the end of five years any surplus
will be distributed on the basis of the same tax sharing
formula prescribed by TFC.
The recommendations come on the eve of a meeting of
state finance ministers to finalize rates for GST. Last
weekend, West Bengal finance minister Asim Dasgupta said
the states would finalize the rates in 15 days.
“This (TFC’s proposal) can serve as a benchmark for
negotiations,” Srivastava said.
Key features of a diluted version of “Flawless GST”
It is to be seen whether the state governments will be
influenced sufficiently to give up their demand for a
dual GST, where states have suggested three rates for
goods and also recommended leaving some goods out of the
tax net altogether.
The finance commission is a constitutional body and
recommends distribution of tax revenues between the
Union and the state governments as well as among the
states.
TFC is chaired by Vijay Kelkar and is due to submit its
recommendations on sharing of tax revenues by 31
December. One of its terms of reference was to study the
impact of GST on the country’s growth and international
trade.
GST, which was supposed to be operational from 1 April,
is to replace the myriad set of Centre, state and
local-level levies with one single rate for both goods
as well as services. The transition to GST will entail
an amendment to the Constitution that will empower state
governments, but also at the same time take away their
present powers to tax since it will now be subsumed into
one national rate. The uniformity of the rate across the
country would economically unify the country.
Key elements of the proposal, which TFC referred to as
the “flawless” model, are that GST should be based on
“consumption” and hence not distinguish between raw
materials and capital goods in permitting input tax
credit; extend to all goods and services; restrict
exemption only to services such as those provided by
Central, state and local governments, and education and
health services provided by non-governmental
organizations. It has also proposed subsuming of most
taxes including taxes on vehicles and taxes/duties on
electricity.
In a potential game changer, TFC has also recommended
integrating the real estate sector into the GST
framework. This is to be achieved by subsuming the stamp
duty on immovable properties levied by the states to
facilitate input credit and eliminate a cascading
impact. It would also be extended to all new commercial
and residential properties and to transactions of
immovable properties in the secondary market.
To discourage consumption of the so-called “sin goods”,
TFC has recommended an excise levy over and above the
GST on items such as alcohol, emission fuels and tobacco
products. No input credit would be permitted on the
additional excise.
“Many countries are moving to a system where higher
rates can be charged on polluting inputs and outputs,
where manufacturers are not given input credit,”
Srivastava said.
This principle brings about fairness in a
destination-based tax such as GST where goods might be
consumed far from the manufacturing centres which bear
the brunt of the pollution, he said.
The introduction of GST is billed as the single biggest
tax reform initiative—a culmination of the incremental
tax reforms that commenced with the publication of the
Long-Term Fiscal Policy in 1985. The move to a
value-added tax, both at the Centre and state level, was
a key incremental step.
