With the central government pitching for the roll out of GST effective 1 April 2017, the focus shifts to the GST rates

Having successfully steered the Constitutional Amendment Bill enabling introduction of a goods and services tax (GST) regime in the country in the Rajya Sabha, the government is moving with alacrity to ensure that the mother of all tax reforms does get rolling on 1 April 2017. It lost no time after the passage of the bill by Parliament in influencing the state governments to ratify the bill. Once the requisite number of states endorsed the bill, it obtained Presidential assent and swiftly constituted the supreme GST council. In fact, the first meeting of the council has been convened this week. We can expect some exciting developments in the coming weeks.

Even before the Constitution Amendment Bill was enacted, the debate on GST rates had well and truly begun. If it were the opposition parties which flagged it as a major issue during the debate on the Constitution Amendment Bill in Rajya Sabha, it’s the trade and industry which is now slugging it out after the bill has been passed. After giving up the demand for incorporating a cap on the GST rate in the Constitution, some of the parties went to the extent of demanding an assurance from the government in Rajya Sabha that the central GST legislation will not be introduced as a Money Bill (and consequently deprive them of the leverage on its contents). State governments too have taken positions in the rate war. Some of the states have questioned the viability of fixing a GST rate lower than 20% implying that revenue yields would be compromised at lower rate. More importantly, some of the states have sought assurances from the industry that the reduced impact of tax incidence following introduction of GST be passed on to the consumers. A major industry chamber (not FICCI) has pitched for GST rate of 18%. Forget about business dailies, mainstream newspapers have joined the guessing game about what the standard GST rate going to be; and every columnist is giving his own piece of opinion.

There is generally an understanding that the goods will be categorised into different baskets for the purpose of levy of GST. Certain basic items such as primary agricultural commodities will be exempt from GST. Essential items used by the populace would be subject to a merit rate. Another basket will cover the demerit goods or items consumed by the so-called well-off sections of the society. All the remaining items will be charged to the standard rate of tax.

Before they deliberate on the rates, the GST Council will have to first take a call on which items will need to be exempted; which items will constitute the merit list and which items should be categorised as the demerit goods requiring a higher levy. Placing the various items in various categories in a rational and objective manner is going to be a huge challenge. There will be demands from various sectors for categorising their goods at exempted rates or merit rates. Given that states have no uniform approach and various states treat various items differently for levy of VAT, the existing VAT structure does not seem fit to be used for prescribing GST rates. On the other hand, excise duty rates having been applied uniformly all across the country and having evolved over a number of decades do offer a reasonable basis for categorising goods into different baskets.

On the aforesaid basis, it is felt that goods fully exempted from the levy of excise duty and VAT by all the states be categorised as exempted goods in the GST regime as well. Goods chargeable to nil rate of excise duty but charged to VAT in most of the states could be suggested for levying a merit rate of GST. Finally, all other goods (except jewellery and demerit goods) could be subjected to the standard rate. There can of course be exceptions to the aforesaid principles for valid reasons.

As for the numbers, since the merit list basket comprises basic essential items, it should be ensured that the merit rate is kept as low as possible so as not to stoke inflation. The demerit rate comes next—here, the attempt, of course, would be to fix as high a rate as possible but fears of incentivising evasion could act as a check against prescribing a fancy rate.

After the GST Council has taken a call on the aforesaid critical issues, it will be required to prescribe the standard rate of GST – the rate at which all the remaining goods would be taxed to ensure that the existing revenues of the Centre and the states are protected and do in fact accommodate to a reasonable growth. This is also the rate which will be applied to tax the services. All services are expected to be levied to a uniform rate unlike the goods. And this is when all the statistical information would be required to be made use of.

This is also the stage when assumptions come into play—how much buoyancy to factor in the revenue collections on account of the likely improved compliance; what will be the revenue impact of the possible growth in GDP on account of introduction of GST regime or how much cushion to be provided for the likely payout to states which experience a revenue shortfall? Officials of the finance ministry, the experts of the Tax Research Unit, and the GST Council secretariat will need to scan the reports by the experts in National Institute of Public Finance and Policy, and the committee chaired by the chief economic adviser besides making their own analysis before they advise the GST Council on what the standard rate should be.

Since we are not privy to the statistical data, it is hazardous to recommend a standard rate, but certainly the businesses and consumers will have their comfort level up in the skies if a combined central and state GST merit rate of closer to 10% and a standard rate of not more than 20% for starters is attempted. At these levels, some experts would agree that the objectives of the merit rate being anti-inflationary and the standard rate being reasonable can be said to have been achieved.

Harsh Mariwala is chairman, task force on GST, and former president, FICCI. He is also chairman, Marico Ltd.