An expert panel set up by the empowered committee of state finance ministers has proposed a broad range of 12-20% for the state-level revenue-neutral rate (RNR) of the goods and services tax (GST). This is after taking into account the existing revenue profile of states and their value-added tax (VAT) rates. The committee, headed by National Institute of Public Finance and Policy?s (NIPFP) Kavita Rao, could not arrive at a single RNR for all states because many states ? particularly Delhi, Madhya Pradesh and Gujarat ? have in recent years kept shifting items from the merit goods category that attracts a lower (4-5%) VAT rate to the standard rate category that attract a higher rate (12.5-14.5%). Also, Delhi has started levying luxury tax on hotels, spas and clubs, over and above the VAT. This lack of uniformity and fickleness in VAT rates among states have made estimation of trend growth in VAT revenue, necessary for RNR, difficult.
According to sources, the Rao committee?s proposals would now be discussed by the empowered committee at its meeting on September 19 here.
However, the central government and the committee led by Jammu and Kashmir finance minister Abdul Rahim Rather, which have so far been discussing a single state-level GST component with only a narrow band of 2-3% to accommodate states? fiscal autonomy, is unlikely to accept the broad range proposed by the Rao panel, sources familiar with the matter told FE. ?Such changes in levy of VAT by states have made it extremely difficult to project revenue collection figures for five years, which is essential to arrive at a revenue-neutral rate for the proposed state component of GST,? said a source, who asked not to be named.
The Centre, which had initially pitched for equal RNRs for both itself and the states, has now come around the view that the states? rate could be a bit ? one percentage point or so ? higher. The Centre, keen to get the states on board for the tax reform, is making many concessions to achieve its end. But it wants the combined GST rate to be low enough for industry to flourish. Both components of GST will apply on roughly the same base.
The empowered committee, sources said, was likely to commission more studies on the possible revenue-neutral rate of GST. It is also likely to deliberate on what might be an appropriate base year for making projections. Many agencies that have pondered over RNR in the past have not only varied in their proposals but also have taken different base years for their projections.
One bottleneck that has cropped up in the implementation of GST is the unwillingness as well as unpreparedness of Uttar Pradesh and northeastern states to adopt the unified indirect tax regime at the same time as the rest of the country. These states have demanded a more relaxed schedule to adopt GST because of their lack of IT infrastructure.
?Some states opting to adopt GST at a later stage will lead to distortions as this would make it difficult to give input tax credit to businesses and traders involved in inter-state trade,? said another person privy to the development.
However, most of the states have accepted the proposal to keep a Rs 25-lakh annual turnover threshold for bringing businesses under GST. At this level, about 65% of traders will go out of the GST net.
