The decks were cleared for political consensus on the Goods and Services Tax (GST) on Friday with recommendations from a committee headed by Chief Economic Adviser Arvind Subramanian backing three of the main demands of the Congress on the pending reform.
In a report submitted to Union Finance Minister Arun Jaitley, the panel recommended that the government drop the proposed additional one per cent tax on inter-state sales over and above the GST rate — a key Congress demand.
The committee recommended a two-rate structure: The lower of these, it suggested, be kept at 12 per cent and the standard rate, at which most products are likely to be taxed, at 17-18 per cent.
The revenue neutral rate, it recommended, be pegged at 15-15.5 per cent.
Barring its suggestion on the “sin or de-merit” rate of 40 per cent, which will apply to luxury cars, aerated beverages, paan masala and tobacco and tobacco products, the rates recommended are within the 18 per cent ceiling the Congress is seeking on the GST.
“The government will study the report of the CEA-led committee on revenue neutral rate for GST and take a view on it,” Revenue Secretary Hasmukh Adhia told The Hindu .
The panel, however, did not favour putting into the Constitutional Amendment Bill the rate of GST. “It would be unwise to encumber the Constitution with the minutiae of policy that limits the freedom of the political process in the future,” Dr. Subramanian told reporters releasing the key recommendations.
Inclusion of a provision capping the standard GST rate at 18 per cent in the Constitution (122nd Amendment) Bill, meant to introduce the GST, is one of the demands over which the Congress did not allow it to be taken up for passage during the monsoon session in the Rajya Sabha, where the Government is dependent on its support for the two-thirds majority required to pass it. It remains the sole potential spoiler over which the Government will now have to negotiate with the Congress.
The committee suggested bringing within the GST alcohol and petroleum products, also in line with the Congress demands.
It recommended that the proposal in the Bill to allow bands for GST rates on various items be dropped in order to avoid complicating the system. The GST will subsume indirect taxes such as excise, service tax and sales tax.
It did not include real estate, electricity and alcohol and petroleum products and services such as education for calculating the tax rate, as some States are averse to giving up tax control from these items, but emphasised that the lower GST rates would become possible if the ambit of the GST is extended to these over time.
Earlier, in a bid to ensure that the Bill clears Parliament in the current session so as to meet the April 1, 2016, target deadline for rollout of the GST, Prime Minister Narendra Modi last week held talks with Congress president Sonia Gandhi and former Prime Minister Manmohan Singh.
“The country has a historic opportunity with GST… It will strengthen the country’s tax institutions, get rid of barriers within States and create a common market,” Dr. Subramanian said.
Implementing a new tax, encompassing both goods and services, to be implemented by the Centre, 29 States and 2 union territories, in a large and complex federal system, via a constitutional amendment requiring broad political consensus, affecting potentially 2-2.5 million tax entities, and marshalling the latest technology to use and improve tax implementation capability, is perhaps unprecedented in modern global tax history, he said.
Dr. Subramanian allayed fears about the impact of the shift to the GST on prices: “The proposed structure of tax rates will have minimal inflationary consequences.”