The recommendations of the Arvind Subramanian committee on GST rates could form the basis for a compromise with the Congress in Parliament, so that the Constitution (122nd Amendment) Bill can be passed in the Upper House. The panel has seen reason in the demand of the Congress that the additional, ‘non-VATable’ 1 per cent tax to be collected on inter-State trade of goods for the benefit of the producing or originating State be done away with. A non-VATable, origin-based tax can have no place in a GST framework that is destination-based, and will ramp up costs, making imports cheaper. If the manufacturing States resist the panel’s proposal, it should be tackled without compromising the GST framework, which is based on simplicity and transparency. Aggrieved States may press for more flexibility in taxing other items, but this will negate the entire idea of moving towards uniform tax rates across the Centre and States. Manufacturing States can instead be given a slightly higher share than conduit and destination States in the ‘Integrated Goods and Services Tax’ — to be collected by the Centre on inter-State transactions at the destination point and shared with States. Perhaps a sweeter compensation deal can be worked out for them in the transition to GST.
The panel suggests a system of rates for the GST Council to work on. While the idea is to move to a single rate structure for almost all items in the medium term, the committee suggests three sets of rates to begin with: 12 per cent for low rate items, 17-18 per cent for the bulk of goods and services (taxed at varying rates now), and 40 per cent for some ‘sin’ or demerit goods such as tobacco, luxury cars and aerated beverages. This set of ideal rates averages out to a ‘revenue neutral rate’ or RNR (one that will yield at least the same revenue as at present) of 15 per cent. The GST Council should accept the panel’s suggestion to increase the tax rate on gold and silver, so that the rate for the bulk of goods and services (called ‘standard rate’) is kept close to the RNR of 15 per cent. This would be in line with existing rates on services, minimising the inflationary impact. A separate regime for alcohol and petroleum products should gradually be done away with.
While a lot remains to be done before GST can be rolled out — the Centre and each State need to enact separate laws so that there is one common list of rates — a speedy passage of the amendment Bill through Parliament and State legislatures should be the first priority. The Congress should drop its demand of codifying the standard rate in the Bill. The panel should not have endorsed the Centre’s right to levy cesses. A fine-tuned GST, balancing federal considerations, will boost India’s ‘ease of doing business’ ranking and spur investment.