Ajit Ranade feels 15-16% could be an ideal GST rate

Currently, taxable services attract around 15-15.5 percent of tax. With services constituting 60 percent of the overall Gross Domestic Product (GDP), a higher rate of 18-20 percent will have an inflationary impact on the middle class, says Ajit Ranade, Chief Economist, Aditya Birla Group.He feels the Goods and Services Tax (GST) rate should be kept at around 15-16 percent. He says New Zealand, which kept its GST as low as 10 percent and still saw its tax revenues go up by 42 percent. Similarly, he feels high revenue neutral rate for India will be regressive and it may lead to low tax collection due to compliance issues.This tax he says will benefit manufacturing companies and do away with all hindrances to inter-state commerce. It will help such companies decrease the burden of entry taxes into states and logistics costs.Below is the transcript of Ajit Ranade’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.Prashant: I read your article that you wrote for the Hindu this morning, it pretty nicely captures the essence of the goods and services tax (GST) as you see it. But I want to straight away get to some of the problem areas that you pointed out. And you began with rates itself. So what is your view? From a corporate perspective on the actual rate which will be beneficial to everyone, especially large conglomerates?A: The big discussion that is going on is what is revenue neutral rate (RNR)? The rate which will keep the state revenues unchanged pre and post GST. I feel this approach is a little flawed because given that GST is supposed to lead to better tax compliance and hence higher tax collection and therefore tax buoyancy, in fact, we will be surprised pleasantly that the tax collections will go up. There is a fantastic example from the case of New Zealand whose tax revenues after GST was introduced went up by 42 percent. And there, RNR was 10 percent, so in fact, they had to reduce it further. So, this focus on a priority calculation at 18 percent or 20 percent is somewhat flawed, we should in fact have a strategy of keeping the rates low. Currently, the service tax rates are at 15 percent anyway and the excise taxes are about 14-15 percent. So, perhaps a better strategy is to go with these low rates and then promise to reimburse the states for any losses, if at all. But I believe that we will be surprised with the tax buoyancy. Higher rates have two bad effects, potentially adverse effects. One is that higher rates can be inflationary and secondly, higher rates actually may lead to lower tax collections, meaning there is a Laffer curve phenomenon that if you just keep raising rates, beyond a certain point, the tax buoyancy will simply go away. The tax elasticity.Prashant: Does a lower rate not pre-suppose a lot of tax buoyancy? A lot of the unorganised sector which does not pay taxes will start paying taxes. It is an ambitious ask.A: Exactly and the lower rates in fact make it easier for the current informal sector which is outside the tax net to actually come in because if you want them to comply and there is going to be, there are already inherent incentives in the GST system which actually make it attractive to comply but higher rates can deter. And of course, if you have too many exemptions, that is another deterrent. So, I believe the strategy should be to keep rates as close to 15-16 percent and then look for tax buoyancy.Ekta: We have been talking a lot about what the inflation impact could likely be once it rolls out by FY18. Your sense in terms of what the consumer price index (CPI) could be in terms of the headline CPI inflation. We just had Arvind Subramanian tell us that it is not going o be too much of an impact and it will probably be limited to around 10-15 basis points, if I am not mistaken. Your thoughts?A: This goes back to the discussion on rates again. If the GST, the standard rate kept closer to 15-16 percent, then the impact on inflation will be marginal because it will be closer to the current rates on service taxes. If the rate goes up closer to 18-20 percent, there will be some marginal impact because as you know services which constitute 60 percent of the gross domestic product (GDP) and the taxable services currently are attracting 15-15.5 percent, that will go up to 18 percent. So, that will have some inflationary impact especially on the middle class. The CPI basket as you know, almost half of it is food for the lower income section. So, food is outside GST. Food is exempt. So, that will not be affected, but I believe that if the rate is closer to 20 percent, there will be a marginal inflationary impact.