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States want GST rate of over 20 pc to protect revenue requirements

Cutting across party lines, states across the country have expressed willingness to join hands with the Centre in rolling out the Goods and Services Tax (GST) regime.
India TV Business Desk New Delhi August 05, 2016 8:33 IST
India TV Business Desk

Cutting across party lines, states across the country have expressed willingness to join hands with the Centre in rolling out the Goods and Services Tax (GST) regime.

The GST Bill, which was long stuck in the Rajya Sabha where the NDA government did not possess a majority, was finally passed by the Rajya Sabha on Wednesday. But it has now emerged that several states have suggested that the standard GST rate should be over 20 per cent to protect their revenue requirements. This was little ahead of the 17-19 per cent proposed by the GST panel headed by Chief Economic Adviser (CEA) Arvind Subramanian.

According to a Times of India report, during the last week’s meeting of the Empowered Committee of State FMs, it was emerged that some states levy 27-28 per cent (this includes VAT and other levies such as entry tax). And hence, the standard rate should be 22-23 per cent.

Kerala FM Thomas Isaac had even advocated a rate of 22-24 per cent and opposed the demand of Congress party to cap the overall GST rate at 18 per cent. The Congress has argued that anything higher than this will be inflationary.

Also Read: No impact on inflation even if GST rate is 18-20%: Finance Ministry

The Finance Ministers had initially said that the standard rate could finally be as high as 20-22 per cent. But Subramanian on Thursday said that while a GST rate of close to 22 per cent will put inflationary pressure, higher rate of 27 per cent will become totally self-defeating.

“Our calculation suggests that if you allow 18-20 percent (GST rate), there is no inflation impact on average. Of course, a few commodity here and a few commodity there, the incidence will go up. But on average, especially for the poorest, I will be very surprised if there is any impact on inflation at all," he said.

"At 27% it is totally self-defeating... up to 18-19% there will be minimal impact on inflation and if it goes to 22% there will be a few basis points increase," he added.

He also said that a low rate reduces the chances of it being inflationary and improves compliance while a high tax rate raises chances of tax avoidance.

"If you raise tax by 1%, compliance comes down by 1%," he added.

Experts also believe an ideal rate should be around 18 per cent that will bring down product prices and ensure better tax compliance. However, there are apprehensions that prices of services could go up.

The Constitutional Amendment Bill passed on Wednesday did not have the GST rate and the GST Council, which will now work out a rate. The GST Council will have representation from both the Centre and states. The subsequent legislations Central GST (CGST) and Integrated GST (IGST) - which are likely to come up for discussion in the Winter Session of Parliament - would mention the GST rate.

With regard to compensation, Subramanian said, it should not be too high.

"Compensation is temporary but rate structure is permanent, therefore we should not burden rate structure in order to generate revenue," he said.

The government has to take a call on how to finance the compensation, he said, adding that it could be done through GST revenue itself. The government can either preserve expenditure target, increase fiscal targets or burden the GST rates, he added.

Asked about deadline, CEA said, April 2017 is a challenging deadline. Further probed on rate, Subramanian said that the report presented by him recommended a range of rates that depend on policy choices.

When asked about the impact GST can have on expanding GDP, he said, one has to be careful about making estimates on GDP growth at this point of time. There can be no assurance on private investment revival by any one policy measure, he added.