The more the exclusions, the higher the tax rate
Though it is encouraging to hear AR Rather, the head of the empowered committee of state finance ministers on GST, say that the 2016 deadline for rolling out GST looks possible, the intransigent attitude of various states may fritter away all possible gains. As part of the 13th Finance Commission’s mandate, NCAER had estimated the gains from implementing GST at 0.9-1.7% of the GDP every year due to various efficiency gains—for instance, trucks that spend nearly 60% of their timeparked at inter-state borders can now move across faster; with logistics costs cut by 20-30%, this will also give Indian manufactured goods a cost advantage. Nothing tells the story of the opportunity being frittered like the dramatic increase in the revenue-neutral-rate of taxation, a level of tax at which neither the Centre nor the states lose any part of their annual revenues. In the original formulation, the 13th Finance Commission task force had come out with a revenue-neutral-rate of 12%, 5% for the Centre and 7% for the states; given current levels of excise/service taxes and VAT rates, this is a considerably lower tax level than that prevalent at the moment. As the states began protesting, and wanted more and more goods kept outside the purview of the GST—alcohol and petroleum products, even land transactions—the revenue-neutral rate kept rising. The latest number being put out by a panel of the state governments is a mind-boggling 27%, a number that suggests there is little to be gained by even embarking on a GST since the rate is very similar to that prevalent today.
What remains unclear is why the states want all these carve-outs. On the face of things, keeping petroleum products out of GST allows them to levy higher rates of taxation than the 12% or so that will be the median rate. Ditto for alcohol. The Centre had, however, come out with a neat formulation on this, to bring petroleum and alcohol into GST at a common rate, but to then allow the states to levy a surcharge, or a sin tax, on this. Levying a GST would mean the tax chain would remain complete and, till the time the good reached the border of the state, everyone involved in producing/trading could collect an input credit—no input credit would be available for the surcharge/sin tax. Not keeping these goods under GST, however, will mean none of the taxes paid anywhere along the value chain will qualify for a rebate. Ironically, while states are worried the central government will not give them their compensation in time—for the loss in revenues due to the introduction of GST—and in adequate quantity, keeping petroleum and alcohol outside GST only worsens matters since states will need greater levels of compensation.
While there has been some progress with both the Centre and the states leaving the threshold level of taxation—the Centre wants this to be increased to R25 lakh while the states want it to be retained at the current R10 lakh—to be decided by the GST Council, the states do need to agree to not restricting the number of goods and services under GST. Anything that increases the revenue-neutral-rate of taxation makes the GST that much less worth the wait.