‘Avoid cess, increase GST peak rate’

harishanker-subramaniam_ey India’s GST journey is in its critical phase with GST Council debating important issues like rate structure, administrative ease and GST law. Multiple rate structure is the pragmatic way forward, and aligned to what CEA report indicated. While debate around what will fall in which rate basket continues, it’s important we have consistent classification across States to avoid issues.

The emerging rate structure is 4%, 6%, 12%, 18% and 26% and the principle appears to be such that goods that currently have an effective indirect tax rate structure (VAT, Excise, CST included) equal to or closer to these rate buckets will tend to fall in those rate buckets. The idea is to maintain the current effective indirect rate in the new GST rate structure with some upside in GST chain due to lower cascading. The 26% peak rate basket means goods with existing effective indirect tax in that range are likely to be covered here. With 40% rate structure only luxury and de-merit goods could have been covered there and rest could have been at 18% or below and would be more beneficial for industry leading to lowering of prices.

Luxury and de-merit goods are also expected to be in this peak rate basket. In cases where the existing effective indirect taxes on such goods are more than 26%, say hypothetically 46% the delta percentage of additional 20 can potentially be applied through a cess mechanism. Cess in such cases is likely to be through article 271 route which the centre will apply. The jury is still not out on this cess mechanism and may get clarified in the next Council meeting.

As a concept, cess is avoidable and industry will not be happy as it will tend to complicate GST system. Till date the idea has been to merge all cesses on goods and services within GST and allow credit through the chain. The cess compulsion seems to have emerged as a compensation mechanism for Centre in case States need compensation under GST. The other alternative will be increase GST peak rate beyond 26% which may be cleaner but the quantum of such increase becomes critical.

Better tax compliance under the new regime is something that seems to have been underestimated both under GST and Income tax unless the revenue buoyancy expectations are proved wrong. So a better idea would have been to wait and watch in the initial years.

(This article first featured in the Business Standard on 24 October 2016)






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