Arvind Panagariya on Monday defended the Centre's proposal of four-slab GST rates.

Niti Aayog vice-chairman Arvind Panagariya on Monday defended the Centre’s proposal of a four-slab goods and services tax (GST) rate structure, beside a cess on luxury and ‘sin’ goods.

There is criticism in some quarters that the multiple rates would distort the structure of the proposed indirect tax regime.

Panagariya also said the April 1 target for rolling out a national GST was possible, though a race against time.

“The criticism that the relevance of GST would be lost due to the proposed four-slab structure is a bit overstated,'' Panagariya told reporters. One should note, he said, that while there might not be a single GST rate for all items, each item would have a single rate pan-India. No tax theory, he added, said two slabs were better than a bit more. If GST would have only one rate or two rates, items attracting a levy of three or eight per cent would see much higher inflation. It is so as rates on these items would have to be stretched much more in that case. Those attracting three to eight per cent now are proposed to come under a six per cent GST rate. The other rates are 12, 18 and 26 per cent, plus a cess.

Panagariya said this gave predictability to the tax structure, as rates were not altered too much as compared to the present one. This would not have been possible if there had been a twin or single rates.

GST, he added, was a process. Hopefully, later, there would be gradual movement towards a single rate.

Giving historical perspective, Panagariya said former finance minister Yashwant Sinha had converged 11 excise rates to three — of eight, 16 and 24 per cent — in 1999-2000. There were two additional non-VAT rates on luxury goods.

On the proposed move to impose a cess over 26 per cent on luxury and sin goods, he said if this was replaced with another tax, the rate would be much higher than the cess, as 42 per cent of it would go to states. Beside, a cess could be temporary and be done away with, once its purpose to compensate states for revenue loss in the first five years of GST roll-out, is over.

The GST Council could not decide on the rates on Thursday as discussion on cess was inconclusive. If cess is decided, then tax rates could be fixed, finance minister Arun Jaitley had said. The next Council meeting on November 3-4 would try to evolve a consensus on the rates.

Former Finance Secretary Vijay Kelkar, who headed the 13th Finance Commission (TFC) that gave recommendations on GST, recently said the proposed structure was disappointing, as it would rob the GST of efficiency enhancing potential. He'd also said the impact of the tax rate proposals on the economy would be only a fourth of the high potential impact the TFC had estimated.

Pratik Jain, partner with PwC, said multiple rates weren't desirable but were perhaps the only realistic way for a consensus. “In particular, a six per cent band is necessary as many products, including food items, currently attract an effective rate of five to six per cent, and having those at a 12 per cent slab could have been inflationary,” he said.

However, he said, a cess on products under the higher slab was not a good idea. It would complicate compliance for business and could lead to cascading of taxes. “Instead , it might be a better idea to increase the tax rate nominally, if needed. In any case, the government might not need to compensate the states if there is revenue buoyancy,” he said.