Four-Tier GST Rate May Lead To Classification Disputes: Economist
Higher the differences among the tax rates the larger the scope for litigation: NIPFP
The four-tier goods and services tax (GST) rate structure will open up floodgates of classification disputes with tendency among businesses to demand lower rate for their goods or services, according to a research paper.
Four tax rates have been proposed under the GST regime, which is expected to be introduced later this year.
“Present discussion on two standard GST rates (12 percent and 18 percent), a lower rate (5 percent) and a higher rate (28 percent) in addition to exemptions will make the design of GST complicated and increase the cost of compliance as well as cost of tax administration,” said Sacchidananda Mukherjee, associate professor at the National Institute of Public Finance and Policy (NIPFP).
“It is expected that, if accepted, the proposal will open up floodgates of classification disputes and there will be always be a tendency among businesses to demand lower rate for their good or service,” he said in the paper posted on NIPFP website.
Voices are being already raised to put plantation crops, labour-intensive manufacturing, infrastructure inputs and air fares under lower tax bracket, he said.
“It is expected that the higher the differences among the tax rates, the larger will be the scope for litigation. The benefits of removal of cascading of taxes will be balanced by higher cost of compliance, as a result the expected benefits of introduction of GST may not be achieved,” said Mukherjee.
He pointed out that there are discussions in the GST Council that there will be a separate cess on demerit goods and environmentally harmful goods.
The objective behind imposition of cess is to generate revenue to compensate the states on account of any revenue loss due to introduction of GST during first five years of implementation of GST. It is not clear whether the cess will be imposed with a sunset clause or it will continue as an additional source of revenue for the central government.Sacchidananda Mukherjee, Associate Professor, NIPFP
The imposition of cess without provision for input tax credit (like Swachh Bharat Cess) will result in cascading of taxes and it will go against the fundamental advantage of introducing GST, he added.
“Earlier, opposition parties in Parliament opposed imposition of 1 percent additional CST (central sales tax) type tax on inter-state movement of goods, as it would have resulted in substantial cascading of taxes.
“It is expected that the proposal to levy cess will receive similar opposition in Parliament when the recommendations of the (GST) Council are taken up for approval,” Mukherjee said.
Last month, the Centre and states had reached a consensus on GST rollout from July 1, 2017.