Tax Rates in GST regime

Goods and Service Tax is by far the most important tax reform of independent India, but today we stand at less than 7 months away and even tax rates have yet not finalized. There seems to be no consensus among Centre and States on this subject. Change of rate will going to have big impact on every small and big businessman. Expansion plans in industry are put on hold till the rate structure is bit more clear.

I.                   Empowered Committee of State finance Minister’s

Empowered Committee of State finance Minister’s opined that SGST as well 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.

They further stated that Services shall have One Tax Rate, precious metal shall be at special rate. However, they have remained silent on specified rate.

II.        State Finance Minister’s Meeting

In a Meeting held on 16 September 2009 between State Ministers: It was reported in media that the SGST for goods would have the following combination:

Ø      Items of mass consumption: Low rate of 4% - 5 %;

Ø      Precious metals: Rate of 1%;

Ø      Goods of local importance, decided by state: No tax; and

Ø      Most items: Standard rate of 8% - 9%

III.       Report by Department of Economic Affairs

Working Paper No.1/2009-DEA on GST Reforms and Intergovernmental Considerations in India issued by the Department of Economic Affairs, Ministry of Finance, Government of India suggested that GST would need to be levied at a combined Centre-State tax rate of 20%, of which 12% would go to the Centre & 8% to respective State.

IV.       Task force implementation report

Task force implementation report has specified that Goods would be categorized as:

1)      SIN Goods; and

2)      Non SIN Goods

The rate of CGST and SGST on all non-SIN goods and services should be fixed at a single positive rate of 5 % and 7 %, respectively i.e. total combined GST rate would be 12%.

As worked out in Task force report Revenue Neutral Rate for the CGST was worked out to be 5%. Similarly, the Revenue Neutral Rate in respect of the state level taxes which are proposed to be subsumed in the SGST is estimated to be 6%. Therefore, the combined Revenue Neutral Rate is estimated to be 11 %.

V.        21 July, 2010 Speech of Finance Minister at the Meeting with the Empowered Committee of State Finance Ministers.

Single rate structure may not be feasible on the date of introduction of GST and requires a phased approach so that the transition is smooth and painless both for the taxpayer and the administration. We are agreeable to the adoption of a dual rate structure for goods at the inception of GST.

In the first  year of introduction i.e. 1st April, 2011:

In the second year of introduction i.e. 1st April, 2012:

In the Third year of introduction i.e. 1st April, 2013:

VI.       In view of this scenario, we might see the rates of taxes and date which this tax was introduces in foreign countries.

Conclusion

Having read VAT provisions internationally we deduce that:

1. Tax Rates in developed countries (Like Australia, Thialand, Singapore and Japan)is quite rational, as compared to VAT rate proposed by States in India which is 18%-20%.
2. Tax Rates in certain countries (Like Russia, Bangladesh, France, Germany, Mauritius, United Kingdom)is quite high, which is in line with GST rate proposed by States in India which is 18%-20%. Notable Countries out of these are France, Russia and Germany where development rate is high even though taxes are pitched at a high rate.
3. Several countries (like USA, UAE, Caymans Island and Hong Kong) have still not implemented scheme of GST.

We see wide disparity in GST applicability and GST rates around the world. Country like India may study each country, however rate should be inline with the revenue neutral rate applicable to Indian Economy as such. Revenue neutral rate as shown in the study of NCAER and Task force report is 12%, proposed GST rate in India shall also be 12%.

While deciding the tax rate government must keep in mind the basic of Economics, which is also proven fact that higher indirect taxes can cause cost-push inflation which can lead to a rise in inflation expectations. No only this but higher indirect taxes also affects the household’s on lower income group. I believe that any rate above this 12% would hamper our productivity and efficiency as an economy.

Exemptions/reduced tax rate

If we see the internationals laws of GST/ VAT very carefully we could pick more or less a common list of exemption which generally includes;

1. transportation,
2. health care,
3. education,
4. Exports
5. books/newspapers

These items are basic necessities of any individual (whether rich or poor). Exemption list drawn by India shall include at least these items so that poor people can be relieved of the unnecessary taxes.