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Things continue to take place at lightning speed on the GST front.

Things continue to take place at lightning speed on the GST front. The constitutional amendment has been passed, draft laws and rules are out, broad consensus has been reached on most of the contentious issues such as ‘dual control’, threshold for applicability of GST and so on. That leaves only one major issue—agreement on rates of GST and list of goods/services that would be exempt from the tax. GST Council is scheduled to meet on October 17-19 to discuss the GST rates.

But getting to an agreement on GST rates is not going to be easy, and there are multiple reasons for it. The CEA report suggested that revenue neutral rate (RNR) should be 18% with a concessional/merit rate of 12%, in addition to a low rate of 1-2% for items like gold, bullion, etc, and many items also exempted. There has already been a lot of heat generated politically on an RNR of 18%, with the principal opposition party insisting on this rate being made the legislated cap. However, the government is walking a tightrope on this one, and it doesn’t seem to be convinced that 18% is doable, particularly because they need to compensate for the losses to states for the first five years. Further, this would mean a lower central GST rate (CGST) of around 9% as against the current excise duty of 12.5% and service tax of 15%. This would, in turn, mean lower allocation of CGST to states (at present, 42% of central taxes devolve to states). Therefore, there might be resistance from states themselves on an RNR of 18%.

Perhaps this explains the recent statement of revenue secretary, that multiple rates should be considered under GST. There are suggestions that the government might be considering four or five slabs, of 10%, 12%, 16% and 25% and so on.

We all know that in an ideal GST system, multiple rates are not desirable and most of the modern GST regimes such as Australia, New Zealand, and even Malaysia, have a flat rate on most products/services. However, in the Indian context, this seems to be the most practical solution for timely implementation of GST, to start with.

There are several advantages of having multiple rates. First, a standard concessional rate of 12% could mean a steep increase in tax on several products, which currently attract an effective rate of around 5-7%. These include processed rice, edible oil and several other food products, medicines, medical devices and even fertilisers. Having a 12% rate on these products could be inflationary and may have other socioeconomic consequences. Completely exempting these products also may not be desirable, as it breaks the GST chain and creates distortions. Many of these products could fall under the 10% slab, or even lower, if the government considers a slab-rate of around 8% as well. Few services that attract a concessional rate of service tax at the moment—like real estate and airlines—also merit a classification under this slab.

Products which attract an effective rate of  10-11% at the moment could be put in the 12% slab. Things like mobile phones, processed food products (other than those covered in the first slab), etc, could fall under this category.

A higher rate of 25% is slightly tricky, and it is important that the government resists the temptation to have a long list of products under this list—in such a case, it effectively becomes the RNR. This rate should be made applicable on few select products that attract a high effective rate, such as luxury cars. It would provide some cushion to the government for having a slightly lower rate (16% and 10% as opposed to 18% and 12%, respectively) on other items.

The remaining items (goods as well as services) should then fall under the 16% slab. This will ensure a minimal change in rate of tax on services, which is currently 15%. There is an apprehension that having a standard rate of 18% GST on services could lead to inflationary trends, particularly because the sector does not have substantial incremental benefits in terms of input taxes. This will effectively make this 16% an RNR, that will be politically acceptable and ensure that GST is not inflationary, which has typically been the experience across the world, at least in the short-term.

While multiple rate-slabs look like a viable solution, it should be ensured that the rates are applied consistently and a common classification of products is adopted across the states. While the GST Council is empowered to decide on a band within which the states can vary the rates, one would expect that at least an attempt is made to have a uniform rate across various states.

From a long-term perspective, we should definitely try to move towards fewer rate slabs as opposed to multiple rates. However, I suspect, all stakeholders are focused on a quick-fix solution to ensure that the April 1, 2017 deadline is met. There is a recognition that even an imperfect GST is better than the current system of taxation.