Oct 18, 2016, 09.54 PM | Source: CNBC-TV18
The Goods and Services Tax (GST) Council headed by Finance Minister Arun Jaitley Tuesday discussed multiple tax rates under the new tax regime.
According to Jain, multiple tax rate is fine but the only risk is government would be tempted to have many products under this 26 percent rate, which could make it a revenue neutral rate. Therefore, there is a need for clarity on which products would fall under this category.
Voicing the same fears, Subramaniam says multiple rate is fine, but multiple rates with so many variation is not going to be good. "If 26 percent is a peak rate then the challenge is there will be a temptation to push more and more rates to 26 percent."
According to Kanabar too, if the gap between 18 percent and 26 percent is small, the attempt will be to push more and more items towards 26 percent.
Below is the verbatim transcript of panel discussion to Shereen Bhan on CNBC-TV18.
Q: Now you have more information from the Kerala Finance Minister on what was the proposal that was presented, your quick response?
Kanabar: Two quick things what you mention is that in computing what should be the revenues that will accrue to the states for 2017-18 compared to 2016-17, a growth rate of 14 percent on a tax basis has been assumed, which I think is a significant step forward because then you know what is it that will be the deficit if the revenues which were budgeted are not collected that is a very important step, but otherwise really lot will depend on what comes up tomorrow because ultimately the key agenda before the council is to determine the rates and we heard the divergence of views out there, what the Kerala finance minister believes and I am sure the other finance ministers will have their pushes and pulls.
Q: On the back of what you heard so far it doesn’t seem like we are getting closer to finalising on that 18 percent number?
Jain: The way I read this as that we are moving towards multiple rates so we are moving away from 12 percent and 18 percent, but we are moving towards 4-5 slabs which is 6, 12, 18 and 26 percent. We did not hear a 40 percent rate which was being talked about in the chief economic advisor report on aerated beverages and luxury cars etc, that could come down to 26 percent. I am happy with that I think two rate structure was not going to work in India to start with - - multiple rate is fine. Six percent lower category is also a welcome move because a lot of food products if you move the rate to 12 percent could have been highly inflationary so that is good.
The only risk that I see in this multiple rate structure is that if you are talking about 26 percent rate - - the temptation of the government could be to have many products under this 26 percent and therefore 26 percent in that sense could become a revenue neutral rate, which we don’t want. We want a clarity that which are the products which falls under this 26 percent, that is very crucial for us to understand.
The other point was that on additional revenue that central government is talking about by way of cess etc is being discussed and that is something which any industry doesn’t want, they want any cesses to apply under GST, because the understanding till now have been that all the cesses and surcharges will go away and tax will be a fairly simple structure.
Q: I wanted to you to comment on the point that we are moving towards a multiple rate structure and we may not like it but the likelihood and the possibility of 26 percent the higher rate of 26 percent that we just heard there from the Kerala Finance Minister perhaps becoming the revenue neutral rate?
Kanabar: If the gap between 18 percent and 26 percent is smaller enough the attempt will be to push more and more items towards 26 percent. We heard the Kerala Finance Minister say that he wants 26 percent to go up so that he could give a lower rate for essential goods. Now 6 percent is as good a rate as one could get really. If the attempt is to move even that down then obviously it will put pressure. So, one of the two things has to happen, either it is that 26 percent will go up to 30 percent or whatever else and that list will be a small list or 26 percent will be the rate and that list should be fairly long enough and that is a danger which one can see there.
Q: Because these negotiations and discussions will continue tomorrow and we broadly heard from the government what its driving philosophy of principle will be. What are the other key risks that you would be mindful of as these discussions proceeds?
Jain: One is obviously the discussion on the rates itself and we would want as Dinesh had mentioned 26 percent only on few commodities and the other is that one would hope that central government is not really talking about imposition of cess, because they have retained Article 270 of the constitution which empowers them to impose cesses and industry is not very sure what will happen to various cesses like education cess and Swachh Bharat etc.
One really hopes that we don’t go in that direction. The other point on the cross empowerment and I think that will also lead to lot of debate between centre and state, because centre is saying that all the service tax assessees would be administered by central government till the time state builds up that capacity and I don’t think that states will readily agree to that because along with the dual taxation, you also have a concept of dual assessment and dual administration, so that will also lead to lot of debate between centre and state and I just do hope that there is a consensus on that which emerges, because that is really very, very crucial for timely implementation of GST to my mind.
Q: On the back of what you have heard so far, the possibility of a cess on high end luxury items, the bands - higher rate being suggested at this point of 26 percent, your first thoughts?
Subramaniam: As far as services rate is concerned majority being 18 percent and some services being at 6 percent is what has been in the rounds as far as discussion on services are concerned. The question is whether they want to go through the rebate route or they want to go have dual rates for services.
As far as the 26 percent peak rate, let me just clarify, there are two options now. If you look at the CEA report, they spoke about luxury goods and some other items to be at the 40 percent rate. That was the CEAs view that we should have a 40 percent rate and allow the GST chain to work. It now appears in the last 3-4 days or week that the rate that they are attempting at a peak rate is something at 26 percent. 26 percent is peak rate, it is not revenue neutral rate. Revenue neutral rate is something that you will compute and which will be equivalent to what revenue you collect today.
So, the peak rate is 26 percent, the question that is being debated is do I go from 26 percent to 40 percent or do I apply 26 percent on some goods and apply a cess.
In my view by applying a cess is probably not a great design to start with because you are bringing in another factor inside the GST system. To me that is something which I personally would not encourage.
Having said that there seems to be a jury that is still not decided as to whether they will go with 26 percent and a cess and in which case cess may not be creditable or they go with a higher rate than 26 percent now. So, that is the debate that will happen.
Q: It was the Haryana Finance Minister when speaking to our colleague suggested that the idea of a cess to fund the compensation fund is something that was put forward to the GST council today, whether or not it should have been is a different story altogether. Do you want to comment on that?
Subramaniam: To me cess is a bad idea it will only complicate a structure. Here we are getting an opportunity after so many years to come up with the cleaner GST, multiple rates maybe a reality, but to bring in a cess is going to be anything but easy to comply from an ease of doing business from an IT change and cess to me is a bad idea, but the most worrying thing which is what has been emerging in the last 48 hours is if 26 percent is the peak rate and for a minute let forget those luxury goods where a cess or an increase rate maybe applied.
If 26 percent is a peak rate then the challenge is there will be a temptation to push more and more rates to 26 percent. Prior to this it was 18 percent and the next rate was 40 percent, which means most of the industry believed that other than specific identified goods or services in the lower rate, most will fall under 18 percent. Now the chances are many will get pushed to 26 percent then I am just wondering, what was the need for GST? If there is no efficiency that is going to be brought up by this tax system and there is no going to be drop in pricing and if you are so concerned about CPI inflation then this whole idea itself is something which I wonder what is the basis for this and that’s the worry that I have.
The more you create 26 percent and for a minute forget luxury goods then the chances of and that’s what your reporter alluded to you will have consumer durables there and I got somebody saying that if it is below this value you are complicating the whole issue. You are bringing back the whole system that we have currently have inefficiently a VAT where a mobile phone below Rs 10,000 is 5 percent, about Rs 10,000 is 14.5 percent you are going back to the same whole system. How would industry really comply with this, how would the system work and I am saying we have got a great opportunity to clean up the tax, but unfortunately multiple rate is fine, but multiple rates with so many variation I don’t know what the industry action is going to be, I can tell you it is not going to be great.
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