GST logjam: Panel suggests dropping 1% additional tax

The panel suggested inclusion of alcohol and petroleum products in GST, as is being demanded by the Congress.

In recommendations aimed at breaking the GST logjam, a panel headed by Chief Economic Advisor Arvind Subramanian on Friday suggested dropping additional one per cent tax on inter-state sales over and above the Goods and Services Tax (GST) rate.

The panel, however, did not favour putting the rate of GST, which seeks to replace all indirect taxes including excise, service tax and sales tax, in the Constitutional Amendment Bill.

It has suggested a revenue neutral rate for GST of 15-15.5 per cent and a standard rate of 17-18 per cent.

The main opposition party Congress, which had blocked the GST Bill in the Rajya Sabha in the last session of Parliament, has been demanding a simple GST and scrapping of the proposed levy of one per cent additional tax on goods. The party has also been demanding that the rate be part of the Constitution Amendment Bill.

The panel, with a mandate to suggest a revenue-neutral rate for GST, has favoured no additional tax on inter-state sales, including one per cent proposed in the GST Bill.

It also suggested inclusion of alcohol and petroleum products in GST, as is being demanded by the Congress.

The recommendations seem to suggest a middle-path approach in the deadlock between the Congress and the government, which didn't want the GST rate to be part of the bill as it would require two-third majority approval of Parliament for any change in future rates for any product.

The government wants the GST Bill to be approved in the current session of Parliament to meet the April 1, 2016, rollout deadline.

"The government will study the report of the CEA-led committee on revenue neutral rate for GST and take a view on it," Revenue Secretary Hasmukh Adhia said.

The panel submitted its report to Finance Minister Arun Jaitley today, which outlines the scope of the ambitious tax reform that aims to create a unified national market.

"The country has a historic opportunity with GST. It will strengthen the country's tax institutions, get rid of barriers within states and create a common market," Subramanian told reporters after submitting the report.

Speaking to reporters on the sidelines of a panel discussion organised by NITI Aayog, Minister of State for Finance Jayant Sinha said the set of numbers in the CEA report will go to the GST Council and then important policy decisions will have to be made on some of these parameters.

Asked if the government will start fresh talks with the Congress, Sinha said: "We are always in discussion and consultations with our colleagues. We are hoping very much that early next week, we will able to continue our discussion and consultations."

The panel analysed three different methods to calculate the crucial revenue-neutral rate -- the rate at which there will be no loss to state and central governments.

While it suggested a range of 15-15.5 per cent for the revenue-neutral rate, the standard rate at which most products are likely to be taxed was recommended at 17-18 per cent.

"This was a technical exercise and we took into account methods using direct taxes, indirect taxes and an approach suggested by NIPFP," he said.

It also provided a range for the GST rate for various products and services, from 12 per cent to 40 per cent – the higher rate being applicable for select products such as luxury cars or tobacco products.

The panel excluded real estate, electricity and alcohol and petroleum products while calculating the tax rate as some states have expressed reservations against giving up tax control on the lucrative items, but the CEA panel suggested these be brought under the GST ambit soon.