Archives: Publication

The GST Council may consider reduction in tax rates on host of items with low revenue implications as part of the tax rationalisation exercise in its next meeting on July 21.

The items which could be considered for cutting of tax rates might include sanitary napkins handicrafts and handloom goods besides certain services.

Several industry bodies and stakeholders have been demanding duty cut on items especially those linked to general health and employment generation in the unorganised sector.

“The Council will take up the issue of rationalisation of taxes on various commodities in view of demand raised by stakeholders. It would focus mainly on those items that are of general consumption and have low revenue implication” an official said.

Most handloom and handicraft products as well as sanitary napkins are currently taxed at 12 per cent while there are demands to exempt them from the levy.

Under the goods and services tax (GST) regime there are four rates – 5 per cent 12 per cent 18 per cent and 28 per cent.

Rolled out on July 1 2017 GST had subsumed over a dozen local levies and transformed India into a single market with seamless flow of goods.

The all powerful GST Council had in its meeting in January 2018 decided to slash the GST rate on 54 services and 29 items.

In its November 2017 meeting the council had removed 178 items from the highest 28 per cent category while cutting tax on all restaurants outside starred-hotels to 5 per cent.

In the first year of GST in 2017-18 the government earned Rs 7.41 lakh crore from the tax since its roll out in July. The average monthly collection was Rs 89885 crore. In the current financial year the collections in April touched a record Rs 1.03 lakh crore followed by Rs 94016 crore in May and Rs 95610 crore in June.

Union minister Arun Jaitley had exuded confidence that higher revenue collections will enhance the capacity of the government to rationalise tax rates going forward.

Meanwhile ruling out a single rate GST chief economic advisor (CEA) Arvind Subramanian on Wednesday pitched for a three-rate structure going forward as revenues stabilise.

He said the goods and services tax (GST) is a “work in progress” and there is a need for further simplification of rates with fewer exemptions and simpler policies.

“In India we can never have one rate. I had recommended a standard rate and one for demerit good one for low rate. I think in India the debate should be about ‘why can’t we have three’ rather than ‘why not one’” Subramanian said at an NCAER event here.

Under the GST regime there are four rates – 5 per cent 12 per cent 18 per cent and 28 per cent. Luxury and demerit goods are subject to cess on top of the highest slab.

Congress president Rahul Gandhi advocated the single rate GST structure. Subramanian said since GST is a regressive tax it won’t be “fair” to have a single rate structure unless there are instruments to protect the poor who get hurt by rising costs.

“I think over time we will see simplification. For example once the revenue stabilises 28 per cent can (be rationalised)…but the broader point I want to make is that why can’t we have three (tax slabs). That’s what we should ask for” said Subramanian.

Union minister Arun Jaitley too had dismissed the idea of a single rate GST as “flawed” saying that it can only work in a country where the entire population has ‘similar and high’ capacity to spend.

Subramanian said that GST implementation “has not been too bad” in the first year of difficult implementation. “My own view is the more you rely on carrot and less you rely on sticks you facilitate formalisation of economy. That’s what I like about GST. It is not heavy handed. Its a kind of self policing” he said.

The CEA headed panel had in its report way back in 2015 had recommended a range for revenue-neutral rate (RNR) of 15-15.5 per cent for the proposed GST with a preference for the lower one.

It also suggested a range of ‘standard’ tax rate of 17-18 per cent for bulk of goods and services while recommending 12 per cent for ‘low rate goods’ and 40 per cent for demerit goods like luxury car aerated beverages pan masala and tobacco. For precious metal it recommended a range of 2-6 per cent.

Subramanian who had often batted for policy rate rate reduction said tighter monetary and fiscal policies were needed to hold the line at the time of shocks.

Amid the demand for cut in taxes on fuel outgoing chief economic advisor (CEA) Arvind Subramanian on Wednesday said oil windfall should have been used for stepping up public investment an opinion which he felt did not find favour with fiscal puritans.

“My own judgement is that we should have used the oil windfall for more public investment but I lost that battle to those who wanted fiscal consolidation” Subramanian said at an event organised by the National Council of Applied Economic Research (NCAER).

He said oil windfall is used for fiscal deficit reduction enhancing public investment and executing the pay commission’s report.

The Centre’s fiscal deficit widened to 3.5 per cent of the gross domestic product in 2017-18 against the Budget estimates of 3.2 per cent. However this was attributed to less revenues that came from the goods and services tax (GST) as one month’s collections was received in 2018-19. The deficit is projected to come down to 3.3 per cent of the GDP in the current financial year. However this would be higher than the original target of reducing it to three per cent.

The CEA however said the government withstood pressure on oil prices.

Subramanian who had often batted for policy rate rate reduction said tighter monetary and fiscal policies were needed to hold the line at the time of shocks.

In conversation with Karthik Muralidharan Tata Chancellor’s Endowed Chair at the University of California the CEA said public sector banks are handicapped by their ability to recruit.

He narrated an incident of former Reserve Bank of India (RBI) governor Raghuram Rajan inviting him for a lecture at the National Institute of Bank Management (NIBM). At a lunch on the occasion Rajan told him that it is an irony that RBI invests in NIBM but public sector banks can’t recruit from the institute as these lenders have their own entrance exam.

The CEA said the political case for privatisation of public sector banks has now become even more difficult after the happenings in ICICI Bank.

He said the RBI has done a good job of bringing 11 public sector lenders under the prompt corrective action and felt that recapitalisation of banks has to be linked to reforms.

Subramanian said he was in favour of the bad bank an idea junked by the government now. “But I have realised that insolvency and bankruptcy code (IBC) is a way forward because the executive would have been in the front role in the bad bank. Now decisions are taken by the judiciary and quasi-judiciary bodies. We need a judicial way to overcome stigmatised capitalism.”

Published in: Business Standard July 12 2018