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GST Council Considering 12% And 18% For Standard GST Rate, Says Revenue Secretary

Council says 14% secular growth rate will be the basis for compensation over five years.

Union Finance Minister Arun Jaitley shakes hands with Delhi Finance Minister Manish Sisodia during the 3rd  meeting of the GST Council at Vigyan Bhawan in New Delhi on Tuesday. (Photographer: Shahbaz Khan/PTI)
Union Finance Minister Arun Jaitley shakes hands with Delhi Finance Minister Manish Sisodia during the 3rd meeting of the GST Council at Vigyan Bhawan in New Delhi on Tuesday. (Photographer: Shahbaz Khan/PTI)

Finance minister Arun Jaitley briefed the media at the end of the first day of a three-day GST Council meet. Jaitley said that the Council had selected financial year 2015-16 as the base year for determining compensation to states on account of revenue loss once the Goods and Services Tax (GST) is implemented. He added that a 14 percent secular growth rate will be the basis for compensation over five years.

“If any state is entitled to compensation, it was finally agreed at that a 14 percent secular rate of growth would be treated as a possible growth rate as far as revenue is concerned,” Finance Minister Arun Jaitley told reporters.

States had asked for grandfathering exemptions given by under-developed states like North East and hill states, but the Centre refused the proposal, saying it will be difficult to bear the burden of these exemptions, Revenue Secretary Hasmukh Adhia said after the finance minister’s briefing.

However, Adhia said there are instances where the central government has given exemptions in north-east and hill states, and the revenue forgone in 2015-16 on account of such exemption given by states would be considered part of their revenue earned for the next five years.

The finance minister said the GST Council had also decided on the definition of ‘revenue’ when determining revenue loss and that the definition will include revenue forgone as exemptions provided to 11 states in calculation of base revenue for FY16.

But Abhishek Mishra, the Uttar Pradesh government representative attending the Council meeting told BloombergQuint that he has questioned the numbers and analysis presented to the Council to arrive at the compensation formula.

The Tamil Nadu government representative, K Pandia Rajan also said to BloombergQuint that the compensation growth rate has not yet been finalised. He added that discussions have now begun on GST rates.

Jaitley confirmed that. In the briefing he said the Council will decide on the broad GST tax rate structure on Wednesday. He added that five different tax rate proposals have been presented to the Council.

Revenue Secretary Hasmukh Adhia told reporters that the Council is considering 12 percent and 18 percent for the standard GST rate, a low rate of 6 percent and a high rate of 26 percent. He added that a cess on tobacco, paan masala and luxury cars can be used to compensate states, and that the clean environment cess will also be included for compensating states.

Tobacco, clean environment cess and luxury cars, all this put together we will have a separate kitty of cess of around Rs. 50,000 crore which will be used for compensating states.
Hasmukh Adhia, Revenue Secretary

The finance minister in the briefing said that the Council will decide on rates that are not inflationary and Adhia later pointed out that 50 percent of the basket of goods and services used to measure consumer price inflation will be exempt from GST.

Rate structure of GST must be such that it achieves that level of revenue, obviously that would be subject to growth rate itself, so a presentation has been made, and documents with regards to this will be circulated to members...the broad approach has been that the rate structure should be such that it does not lead to further CPI inflation.
Arun Jaitley, Finance Minister

After the Council meeting, Kerala finance minister Thomas Issac said his state government wanted the highest rate to be fixed at 30 percent so that common man items can either be exempt or levied with lower tax rates.

Reacting to the deliberations of the Council, tax expert Bipin Sapra, in an emailed comment to BloombergQuint, expressed concern regarding the continuing levy of cess.

The proposed four slab rate for GST appears a reality given the present rates of indirect taxes. However, the ability of government to levy a cess over and above this will skew this structure and increase the tax burden.
Bipin Sapra, Tax Partner, EY India

This is the third meeting of the GST Council and will continue on Wednesday and Thursday.