Decoding the revenue neutral rate

Mahesh JaisingGoods and Services Tax (the ‘GST’), which the government intends to introduce in 2016 would overhaul the entire indirect taxation regime. However, implementation of GST has met with stiff resistance from various political quarters. Despite this, government seems to be committed towards GST implementation as per the schedule and has been taking active steps. Panel headed by the current Chief Economic Advisor (‘CEA’) to the Indian government has submitted a report which inter alia suggests a revenue neutral rate (RNR) of 15% to 15.5% and a standard rate of 16.9% to 18.9%.Contrastingly, the report of the task force on GST (13th Finance Commission), 2009, recommended an RNR of 11 % and a standard-rate of 12 % [comprising of 5 % (CGST) and 7 % (SGST)]. However, comparison of the tax rates suggested by the above two committees would be futile, as the rate of tax per se is a function of various parameters including the prevalent socio-economic conditions, which, evidently, have changed significantly over a period of 6 years (from 2009 to 2015). While the range for standard rate has mentioned, the pattern for proportion of CGST and SGST rates can be discerned only on perusal of fine print of the report. On the rate of GST rate itself, the CEA panel is of the opinion that the rate should be outside the purview of the constitution, thereby bringing the GST rate within confines of the legislative process.Currently, while the rate of excise duty is 12.50 %, effective excise duty in respect of MRP products is 8% post abatement, coupled with VAT at 14%. Under GST, the standard rate being 17%-18% as against the current rate of 22%, it appears that a manufacturer/trader stand gain well under the GST regime and hopefully the benefits are transferred to the end consumers. On the other hand, with the recommended standard-rate of 18% on services, as against the present rate of service tax at 14.5 %, the cost of services is likely to increase and essential services, such as banking, telecommunication, and insurance will cost dearer to the common man. However, for businesses, given that GST regime envisages free flow of credit, cascading effect of non-creditable taxes (as prevalent) should be mitigated. The CEA Panel has aptly recommended for an elimination of 1% additional tax, which has been the centre stage of controversy and been vehemently opposed inter alia on grounds of its cascading effect on supply/distribution chain. It may be recollected that the report of the Select Committee of the Rajya Sabha ‏on the GST Bill issued in July 2015 had recommended that additional tax levy ought not to be on “supply made without consideration”. It may be recollected that additional tax having being proposed in the GST law to compensate the states on the revenue loss owing to forgoing the CST reimbursements by the centre, proposal to withdraw the same would face strong retaliation by the states, albeit favorable to industry at large. However, if the centre were to devise an alternate mechanism to underwrite the states’ losses in a time-bound manner then the resistance per se would be watered down. Another interesting aspect recommended by CEA Panel is the introduction of a sin/ demerit rate of 40% for luxury cars and tobacco products in alignment with the international practice. Prima facie, this rate appears quite high, given the proposed standard rate. Also, it would be interesting to watch out the definition of ‘luxury cars’.Lastly, while a lower rate is proposed for essential goods, it is imperative that the GST law provides a comprehensive HSN based ‘list of goods’ on which such lower rate would apply, which is consistently applied across States, thereby avoiding disputes and litigation. In this context, it would be worthwhile to note that there has been intense litigation in the past pertaining to classification of goods subject to lower rate, particularly in the IT industry with a number of IT products being differently classified in various states under the VAT laws leading to litigation and disputes. In the above backdrop, while the recommendations made by the panel are welcome, the fate of the most controversial recommendation of elimination of additional tax is to be closely watched. Further, with submission of the report itself, it appears that the government is readying towards implementation of GST and it is time for industry to start their ground work at the earliest.Author is partner BMR & Associates LLPMamatha Anand, associate director, BMR & Associates LLP contributed to this article