Arun Jaitley comes out in defence of four-tiered GST rates

Air conditioners and Hawai chappals cannot be taxed at the same rate, Finance Minister Arun Jaitley said in a blog posted on his Facebook page.

Finance minister Arun Jaitley has come out strongly in defence of the Centre’s multiple GST rate proposal arguing that such a structure was inevitable as diverse products like ACs and bathroom slippers cannot be taxed at the same rate.

“The reality is that a multiple tax rate in India is inevitable for several reasons,” Jaitley said in a blog posted on his Facebook page. “Air conditioners and hawai chappals cannot be taxed at the same rate,” he said. “Different items used by different segments of society have to be taxed differently. Otherwise the GST would be regressive”.

Jaitley’s remarks come barely a week before the GST Council, headed by the finance minister, meets on November 3-4 to further discuss the rate structure. Several rough edges are yet to be ironed out the four-tier system that the Centre had proposed on in its last meeting on October 18.

The Centre had proposed a four-slab rate structure –6, 12, 18 and 26 percent—along with a 4 percent levy on gold. The centre has proposed two standard rates of 12 percent and 18 percent extending to a majority of the taxable goods. Around 50 percent of the items in the retail inflation basket, primarily food items, will be exempted from GST.

“There will be a zero tax on such items. The object of this is to ensure that the GST structure is not regressive or burdensome on the common man,” Jaitley said. A lower tax slab of 6 percent is proposed for those essential commodities on which no excise duty is levied at present by the centre but a 5 percent value-added tax is levied by the states.

The principal rationale behind this tax structure is that items which are presently taxed at rates closer to the range of each of the slabs will be fitted into the particular rate of the slab. Those presently taxed below 3 percent as the total tax of the Centre and the States will be taxed at a zero rate.

Those between 3-9 percent will be taxed at a 6 percent rate, those between 9-15 percent will be taxed at 12 percent and there would be a standard rate of 18 percent. Critics have pointed multiple rates will make the system regressive and will go against the principle of an uniform tax structure. Jaitley said that tax on some products in a narrow slab regime could fan inflation.

“A commodity being taxed by the Centre and the State at 11 percent at present will be taxed at 12%. If it’s taxation is suddenly raised on standard rate of 18 percent, it would disrupt the market and would be highly inflationary,” he said.

The Centre has proposed a cess on luxury goods for five years to create a dedicated corpus to compensate states for potential revenue losses after migrating to GST. The Constitutional amendment guarantees a five year compensation to these States. The centre estimates total compensation to states for losses arising from a transition to GST to be around Rs50,000 crore in the first year.

This will be met through a fund—Rs26,000 crore will come from the corpus generated by the levy of the clean environment cess on coal and Rs 24,000 crore collected from the cesses to be levied on demerit goods such as tobacco, luxury cars, pan masala and aerated drinks.

All other existing cesses such as the Swach Bharat cess will be subsumed under GST. Jaitley said that raising direct taxes was not an option as it would be burdensome on the common man. A cess, however, “would ensure no additional burden on the tax payer and yet be able to compensate the losing States”.

“The benefitting States are not compensating the losing states. The Centre, as a non-beneficiary, has to compensate and the proposal for continuing existing cesses for five years to the extent of compensation required is the more benign way of compensating the losing States without burdening the tax payer,” he said.

Total tax eventually collected has to be revenue neutral. The Government should not lose money necessary for expenditure nor make a windfall gain. Once an agreement is reached on rates, the council will again meet on November 9-10 to decide on the draft GST legislations.