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Moving swiftly on the road to formalising the biggest reform of the indirect tax regime, the Centre and the States on Tuesday reached an agreement on the formula for compensation under the goods and services tax (GST) and also initiated discussions on the rate structure.
The Finance Ministry has proposed to the GST Council that the tax have a four-rate structure with two standard rates of 12 per cent and 18 per cent. Food items and other necessities will be taxed at 6 per cent, while white goods and luxury products will be taxed at 26 per cent.
Gold will be taxed at 4 per cent. Additionally, a cess will be levied on ultra-luxury items, tobacco products and pan masala and environmentally harmful products in order to equalise the levy to the current level of tax. This will bring in about ₹50,000 crore, which will be used to compensate the States for any revenue loss.
“The objective is that the rate structure should not lead to any further retail inflation. The Centre and the States should have adequate revenue and it should also put the least possible burden on the taxpayer,” said Finance Minister Arun Jaitley at the end of the first day of the Council meeting, adding that there are five options given to States for the rate structure under GST.
The discussions on the rate structure will now continue on Wednesday and after an agreement is reached, a technical group of officials will decide the tax slab for each item. A senior Finance Ministry official said the rationale behind the proposed rate structure is to ensure that the tax incidence is not higher than the existing rates of excise, value added tax and other levies.
However, some States held a different view on the rate structure. “Worst fears confirmed — GST to be regressive. Tax on luxuries to be reduced to 26 per cent and on necessities to be raised to 12 per cent,” said Kerala Finance Minister Thomas Isaac, adding that the proposal for cess contradicts the original concept paper for GST.
Jaitley said the issue of cross empowerment of the Centre and State tax officials on the existing 11 lakh service tax assessees will be taken up after a decision on rates.
The Council reached a consensus that compensation to States for any revenue loss would be limited to the taxes subsumed under GST. Input tax credit given for intra-state transfers would be included in the definition of revenue, Jaitley said.
Further, the notional tax revenue arising out of exemptions to the North East and Hill States would also be included in revenue.
Jaitley, further said that a 14 per cent growth rate in revenue is projected using a base year of 2015-16.
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