GST - Tax rate Structure

Dear Friends/Colleagues

In my previous article I shared my knowledge about the levy and chargeability of GST. In this article I am sharing with you about the rates of GST that will be applicable in future. In this regard there has been the different opinion of various committees and departments. But till now there has been no official announcement regarding GST rate in India. State and Centre are in dispute regarding the fixation of GST rate in India.

Opinion of Empowered Committee of state Finance Minister

Empowered committee is opined that the SGST and CGST FOR GOODS should have two rate tax structure.

a) Lower Rate – For Necessary items and goods of basic importance

b) Standard Rate – for other goods in general

One tax Rate for Services

There will also be a special rate for precious metal like gold and silver. But they remained silent on specified rate.

Opinion Of Department of Economic Affairs- working paper no. 1/2009

DEA vide its working paper no. 1/2009 is of the opinion that combined centre-state tax rate should be 20% of which 12% would go to the centre and 8% to the respective states.

Opinion of State Ministers meeting

In a meeting held on 16 sept 2009 between state ministers, it was reported in media that SGST FOR GOODS would have the following combination.

· Items of mass consumption- low rate of 4% - 5%

· Precious metal - 1%

· Goods of Local Importance as decided by the state : no Tax

· Most Items : standard rate of 8% - 9%

So the above were the different opinion of the committees and departments.

Revenue Neutral rate (RNR)

In my opinion the GST rate should be revenue neutral rate (RNR). First of all we would understand the meaning of RNR.

GST is primarily an exercise in reforming the consumption tax in india and not is an exercise for additional resource mobilization through discretionary changes in taxes, hence the GST rate should be such rate which will yield the same revenue to the centre and state as collected from the various taxes which will be subsumed in the SGST and CGST. In other words GST rate should be such rate which generates the same revenue to the state and centre as generated in the current tax structure. If the GST rate is above the RNR it will create burden on consumers as goods and services will be costlier and if GST is below RNR then it will not be beneficial for our economic development as centre and state will not have the sufficient revenue to invest.

This RNR for GST shall be unique (different) for each state depending upon their prevailing taxes, taxpayer base and list of exempt items. About 80% of the states have written that their calculation indicate that a RNR would be in the range of 18 – 20%.

My Opinion : In my opinion there should be  a single rate for goods and services then only in real terms it will be tax on value addition otherwise the same issues as are arising under VAT shall arise. As regards the services there would not be any issue for the application of the single GST rate being in the present tax structure also the services are chargeable at a single rate of 12% but as far as the goods are concerned if the single rate (say 8%) is applied then the goods of mass consumption and local needs will become costlier. But in contrast to it if different GST rate structure is applied for goods then the following problems will arise.

i) Raw material and intermediate goods may be charged at the higher rate and finished goods at the lower rate especially with the intention to apply the lower rate to necessities, this would result in input credit accumulation and demand for refunding the same from time to time. The same problem as creating in current VAT structure.

ii) Adopting a dual rate for goods would demand the dual rate for services as well.

iii) Having the dual rate for goods and services would imply that the distinction between the goods and services should continue.