Although there are various estimates by government and independent agencies of a revenue-neutral rate (RNR) for the goods and services tax (GST), it is clear that the Centre has room to raise the excise and service tax rates in the run-up to the proposed comprehensive indirect tax likely to be ushered in from 2014-15. With few options to boost revenue buoyancy and a tough fiscal deficit target of 4.8% set for 2013-14, finance minster P Chidambaram might look at the option of raising the median central excise duty from 12% at present by one or two percentage points in the Budget. The policy of having a negative list of service tax might help boost revenue from this head, which still remains the fastest-growing one but has shown signs of a plateauing in the last couple of years.
After the recent Centre-state consensus on issues that so far delayed the introduction of GST, officials of the central and state governments are now struggling to agree on the structure of the “destination-based consumption tax” that militates against tax cascades and is expected to yield an additional one and half percentage points in GDP growth. As the table shows, the RNR for GST estimated by various agencies is much below the arithmetic total of central excise/service tax and state VAT rates at present. Of course, combined (Centre-state) GST rates being discussed among policymakers are much higher (from 16% to 20%) and so the Centre has flexibility to raise rates for a year.
This is not to forget that the GST base would be different from those for the central excise, service tax and state VAT at present and it includes many other levies of local nature, including entry tax and purchase tax. The GST regime will also allow states to tax services and the Centre to tax goods up to the retail level, as against the ex-factory level at present.
In spite of the Union government relenting on central sales tax compensation to states, those with a strong manufacturing base such as Gujarat protested at last week's deliberations of state finance ministers in Orissa that the tax proceeds on interstate trade going to the consuming state was not fair on them.
The other major issues on which a consensus is vital for Chidambaram to be able to introduce a revised GST Bill in Parliament in the monsoon session is a Centre-state deal on a revenue-neutral rate of GST and dual-centre state controls.
Observers feel that there could indeed be an announcement on the transition to GST in Budget 2013-14, although it is unlikely that the rates would be announced. The states have secured a favourable view form the Centre on their having the flexibility to move rates within a narrow band for items of local importance and considering revenue exigencies.
Chidambaram, sources said, is likely to make “positive noises” about the proposed unified indirect tax regime. Keen to revive the economy, the finance minister is using his negotiating skills for a grand political give-and-take deal on the three outstanding issues with states. He is also likely to emphasise in his budget speech the progress made on GST such as the agreement on compensation and the flexibility given to states to decide when to adopt GST.
Experts said that a compromise on the nature of GST as a destination-based consumption tax could affect the cost competitiveness and other economic benefits it is projected to bring. As part of introducing GST, the central sales tax that goes to producing states will be abolished. In the new regime, the state component of GST would go to the consuming state on both sale of goods as well as on stock transfers.
“Claims that interstate GST proceeds going only to the consuming states being unjust to the manufacturing states are not fair at all. To realise the full benefits of GST, it is incumbent upon all to have a consensus on the design of GST and to stick to it,” said Prashant Deshpande, senior director, Deloitte.
“The philosophy of GST is of a destination-based tax. It should stay so,” said Harishanker Subramaniam, indirect tax partner, Ernst & Young.
At the Bhubaneswar meeting of the empowered committee of state finance ministers last week, the Centre and states agreed on including petroleum products within GST with states having the power to levy extra taxes on them without input tax credit facility, dropped the proposal to have a Dispute Resolution Authority chaired by a judge and decided on a phased roll-out of the new tax regime.
While states agreed to including petroleum products in GST as suggested by a task force set up by the 13th Finance Commission, a revenue-neutral GST rate to be introduced from 2014-15 is still elusive. The global average GST/VAT rate is around 16.4%. The average rate in the Asia-Pacific region is 9.88%, while Canada and Nigeria have the lowest rate of 5%.
Another key area to be decided upon is the threshold for GST to kick in. The task force set up by the 13th Finance Commission had suggested the abolition of the current Rs 1.5-crore exemption given on levy of central excise duty and recommended applying a threshold of Rs 40 lakh for GST. It also recommended a uniform and limited list of exemptions. As per this, petroleum products and alcohol are to be subsumed in GST on which states could levy extra tax without input tax credit. Besides, the real estate sector and the entire financial services sector should also be brought under GST. It also recommended that stamp duty, purchase tax, duties on electricity as well as taxes on goods and transportation to be subsumed in GST. The list of exemptions have to be common and minimal, it said adding that education, unprocessed food and select public services could be out of GST.