The Constitutional Amendment Bill was passed in the Rajya Sabha on Wednesday to introduce a country-wide goods and services tax (GST), shifting the focus on the tax rates.
Under the new system, the states and the Centre will collect identical rates of taxes on goods and services. For instance, if 18% is the GST rate on a good across the country, the states and the Centre will get 9% each called the CGST and SGST rates.
The Centre will also levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one state to another.
There has been no agreement yet on rates of various goods and services, which remains a tricky issue. Last week state finance ministers told the Centre that the rate should provide relief to common citizens and small businessmen while not resulting in loss of revenue to states.
A panel under chief economic adviser Arvind Subramanian has recommended a revenue-neutral rate of 15-15.5%, with a standard rate of 17-18% be levied on most goods and all services.
A revenue-neutral rate is a single rate at which there will be no revenue loss to the centre and states in the GST regime.
The panel has recommended a three-tier rate structure wherein some essential goods will be taxed at a lower rate of 12%; so-called demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products at a higher rate of 40%; and all remaining goods at a standard rate of 17-18%.
The National Institute of Public Finance and Policy (NIPFP) favoured a standard rate in the range of 23-25% if goods are taxed at three different rates—a special rate for precious metals, a lower merit rate for some important goods as well as a standard rate that will be applicable to most goods.
It had also suggested a GST rate of 18-19% in case of a single GST rate — that is all goods are taxed at the same rate.
The 13th Finance Commission headed by former finance secretary Vijay Kelkar had suggested 18% as a possible GST rate.
According to the Bill, passed in the Lok Sabha in May 2015, the rates were to be decided by a GST council headed by the central finance minister with state finance ministers as members.
While GST rate will not be capped in the Constitution Amendment Bill, the Congress has sought “legal ring-fencing” of the rates to insulate common citizens and small businesses from possible adverse impact from the high indirect tax rates. States also want a provision to ensure that their revenue is not hurt.
The government may suggest a ceiling in the “supplementary” or sub-ordinate legislations that will have to be passed after the main central law is enacted. These include the state GST law, the central GST law and the inter-state GST law.
These are enabling legislations that are necessary for rolling the new tax system.