NITI Aayog Vice-Chairman Arvind Panagariya on Monday took on critics of the Centre's proposals to levy a cess on top of the Goods and Services Tax (GST) with four tax slabs ranging from six per cent to 26 per cent apart from a zero-tax category.
Cess helpsMoving to just two rates or a single GST rate, instead of the four rates in the range proposed by the finance ministry to the GST Council, could trigger inflation in some products and services, Mr. Panagariya said. The cess on GST would help the Centre compensate states for revenue losses for five years and could be wound down after that, he pointed out, as opposed to the alternative of imposing higher GST rates to ensure that the central exchequer has enough in its own kitty to compensate loss-making States.
“Two issues have been raised about the rates’ structure and the cess proposal on GST, with some people having said there are too many rates,” Mr. Panagariya said. He added that analysts who felt the gains expected to accrue from the new indirect tax regime would be lost with multiple tax rates, have ‘overstated’ the problem without understanding the historical context of India’s indirect tax reforms.
“Till 1999, there were about 11 rates of excise duty – which Yashwant Sinha as Finance Minister modified to three rates – 8 per cent, 16 per cent and 24 per cent. Since then, the rates have changed a lot and we again have multiple tax rates,” he pointed out.
Inflation impact“A lot of people have identified GST as a single tax rate across commodities, when the larger part of the gain is having a single rate on any given product across the nation. If we do a single tax rate of say, 16 or 18 per cent, some rates will have to be raised very far up,” Mr. Panagariya said, highlighting the ‘inflation implications for those commodities that go from low rates to 16 per cent in one go.’ On the contrary, moving some goods from four per cent and others from eight per cent to a standard six per cent rate would not only moderate the inflation impact but also reduce the prospects of revenue loss.
“It’s more predictable. These are things that haven’t been picked up properly and most analysts haven’t thought through the historical background or the problems of adopting a single rate in one go,” Mr. Panagariya said. If the government were to opt for a straightforward GST regime without a cess, the tax rate would have to be much higher as 42 per cent of revenue is devolved to the states, to whom the Centre has committed to compensate for revenue losses in the first five years of GST implementation.
“100 per cent of the cess proceeds will go to the Centre and the advantage of cess is it’s supposed to be temporary. If it is imposed for the specific purpose of compensating the states, then it will be dropped after five years and you will get a lower rate,” he said.
