As the Centre and states kick off consultations to decide the crucial rate for the goods and services tax (GST), the Modi government is all set to back a pocket-friendly rate, amid indications that a standard rate of 18-19% might receive the government’s backing.
On Monday, the Cabinet cleared the establishment of the GST council, the panel headed by the Union finance minister with all state FMs as its members, setting the stage for nuts and bolts issues to be thrashed out with the government setting a two-month window for the exercise. States such as Kerala have been vocal in suggesting the levy should be upwards of 20% to ensure that state revenue collections are not impacted by the GST rollout from April.
“We need to ensure that the basket that makes up the consumer price index is not affected. The message is clear that gareeb ki thali (poor man’s plate) should not get expensive. The CPI (consumer price index) basket will not be impacted. There is commonality of focus (between the Centre and states) on this,” said a source, adding that the rate could be lowered but not raised at the expense of the common man’s “thali (meal)”.
Sources said the Centre would in any case compensate the states for any revenue loss for five years on account of GST implementation but added that the negotiations would be challenging. A consensus will quicken GST rollout but a stalemate over the rate and other issues such as exemptions, compensation formula and nitty-gritty of draft legislation will require more political negotiations.
The rates will be top of the agenda when the GST council holds its first meeting on September 22 and 23 although revenue secretary Hasmukh Adhia said the agenda is being finalised. The GST council will decide the standard rate along with the levy on essential goods, which will be lower, and a higher rate for demerit goods such as soft drinks and luxury items. For instance, the government wants to make a distinction in the levy on small cars, SUVs and luxury vehicles.
A panel headed by chief economic adviser Arvind Subramanian had estimated the revenue-neutral rate at 15-15.5% and suggested that the standard rate should be in the range of 16.9% to 18.9% with a lower band of 16.9-17.7% being the preferred option. The highest rate was pegged at 40%.
Apart from the rates, the Centre and states also need to agree on the final compensation structure, the list of exemptions, control over entities, the final draft of the three bills, India GST, Central GST and the state legislations, after factoring in the feedback received from industry.
While most states have come on board, including those ruled by the Congress which was stalling the reform move, others such as Tamil Nadu and West Bengal are holding out saying the proposed tax regime is not in their interest. Government officials, however, said states did not have a choice but to be part of the GST regime as the Constitution now mandates the levy.
Adhia said the government is on course to move to the new regime from April although there have been suggestions from certain quarters that the target may not be feasible.