After the ratification of the GST legislation, the center and state governments are starting the next mega work of determining the rate structure of the new unified tax. The difficult phase of deciding the GST rate structure and selection of the commodity/service groups with consensus is the main milestone in the GST reform.
The rate structure of the GST will be decided by the newly constituted GST Council which is going to be meet on September 22 and 23 at New Delhi. Though GST has been practically accepted by the country’s administrative federal constituents, the tax rates are to be determined. It is the GST Council that led by the Finance Minister and comprised of state Finance Ministers that will decide the crucial tax rates.
The most difficult work of the Council will be fixation of the standard GST rate. This is the rate that will be applicable for most of the goods and services. Centre’s Aravind Subramanian Committee suggested a revenue neutral rate of 18%. But states are apprehensive of revenue loss and are insisting on a 20% plus rate to protect their revenues.
Selection of the merit and non-merit goods on which tax rate will be lower and higher compared to the standard rate is also done by the Council.
A major practical issue that should be addressed by the Council is how service tax rate will be handled. Service tax rate is 15% at present much below than the cumulative 27% on goods. Merging the two and setting a common rate was the so far accepted approach. But when the service tax rate goes up to 20%, it may cause serious distortions according to many experts.
In this context, the Council may search for a separate standard rate for services which will be lower than the goods rate. If this is the policy, the Council may go for a 20% plus standard rate on goods and a 16- 18% standard rate on services.
Given the fact that the revenue neutral rate is a guess work so far, search and consensus for a standard rate will be much complex especially in the context of the uncertainty about service tax treatment.
Hence the work of the GST Council may be just initiated on 22nd and a conclusion can be extended sometimes closer to the deadline of the general budget.