Finance minister Arun Jaitley said on Friday an 18% cap on the goods and services tax (GST) rate as suggested by the Congress would result in a flawed system as it could lower duties on a host of “sin” products and luxury items that should attract higher taxes.
Jaitley’s comments came on a day a panel led by chief economic adviser Arvind Subramanian batted for a standard GST rate between 17% and 18% and a revenue-neutral rate (at which there would be no revenue loss to states or the Centre) of 15-15.5%. In a report to the finance minister, the panel also suggested scrapping a 1% additional levy or “entry tax” on cross-border transport of goods, a recommendation in keeping with the Opposition demand.
“There are sin products (such as alcohol and cigarettes) that need to be taxed high. There are polluting products and there are luxury items that should attract higher taxes,” Jaitley said at a session in the 13th Hindustan Times Leadership Summit.
The Subramanian panel report proposed a three-tier rate structure —12% for essential items, 40% for “demerit goods” such as luxury cars, aerated beverages, pan masala and tobacco products, and 17-18% for all the rest.
The GST, billed as the country’s most ambitious tax reform, aims to stitch together a common national market by dismantling fiscal barriers among states. Once implemented, it will replace layers of local levies such as valued-added tax and octroi by a single nation-wide tax.
The 122nd Constitution Amendment Bill, passed in the Lok Sabha in May, is stuck for want of political consensus in the Rajya Sabha where the ruling BJP does not have a majority.
The Congress, which had for years advocated the need for a country-wide indirect tax system, has insisted that the GST rate be capped at 18% in the legislation itself. It also wants the government to remove the 1% “entry tax” aimed to benefit the so-called “producing states” such as Gujarat and Tamil Nadu. Besides, it wants a more empowered dispute resolution mechanism stipulated in the bill itself.
While the government has indicated willingness to remove the “entry tax”, imposing a ceiling on the rate has remained a contentious point.
Last week, Prime Minister Narendra Modi invited Congress president Sonia Gandhi and former Prime Minister Manmohan Singh to discuss a way out of the logjam.
Jaitley also said the government will be able to meet the extra spending for higher salaries to central government employees based on the seventh pay commission recommendations.
The government’s total spending on employee payouts will rise by Rs 1.02 lakh crore. Of this, expenditure on pay will go up by Rs 39,100 crore and on allowances up by Rs 29,300 crore, while revised pensions would cost the exchequer Rs 33,700 crore.
The government’s overall payout will be lower because of no arrears this time, compared to the previous pay commission, which came in late.
“I am not particularly worried about meeting the fiscal deficit targets,” Jaitley said. “This year, the fiscal deficit target will not only be achieved, but also the quality of fiscal deficit will be far better,” he said.
The finance minister said as the economy expands, the government’s ability to absorb such spending spikes increases. He likened the ministry’s task to that of a housewife, who has to juggle multiple objective with limited resources.
“Just as a housewife does, we keep on saying no to demands for spending, but still manage to find out money from hidden sources to keep everyone happy,” Jaitley said.
He said rationalisation of subsidies has been one of the biggest uncelebrated reforms of the Narendra Modi-led government.
Jaitley credited former prime minister Narasimha Rao and the then finance minister Manmohan Singh for introducing reforms in 1991 that steered the economy out of a major foreign exchange crisis. “Successive finance ministers have broadly adopted the same approach and left their footprints,” Jaitley said.