As government looks to implement the Goods and Services Tax (GST) from April next year, Finance Minister Arun Jaitley on Thursday said the tax rate will be "optimum" even as there were indications that it may be higher than 18 per cent.
A day after Rajya Sabha approved a constitutional amendment to pave the way for rollout of GST, he said the tax rate will be decided by the GST Council, which will have Union Finance Minister and representatives of all 29 states.
"We are going to try to make it reasonably as quick as possible... it is always good to set stiff targets and try meet them, rather than have no targets at all," he said.
Revenue Secretary Hasmukh Adhia said the Union Government would want half of the states to ratify the bill within the next 30 days so as to allow GST Council to finalise the legislations that will set the rate and other terms.
Jaitley said the government is targeting to bring the legislations -- the Central GST Bill and the Integrated GST (GST) Bill -- before the Parliament in the Winter Session of Parliament in November.
Chief Economic Adviser Arvind Subramanian, who had previously recommended a standard GST rate of 17-19 per cent, said while a GST rate of close to 22 per cent will put inflationary pressure, higher rate of 27 per cent will become totally self-defeating.
Adhia on the other hand said it would be "premature" to expect the GST's standard rate to be 18 per cent saying it would imply significant revenue losses.
Central excise duty and state VAT taken together added up to 27 per cent currently.
"I think what you need is an optimum rate... Currently what the tax payers are paying is phenomenally much higher...
Now it will gradually slide down. But even in the first instance it will come down," Jaitley said.
The GST Bill passed by Rajya Sabha yesterday will have to go to Lok Sabha before it is sent to states for ratification.
On the impact of GST rollout on inflation, Jaitley said over the years, the tax rates will come down and hence the prices of many commodities will also decline.
"Over the long-term, tax rates will come down, and if tax rates come down then it is natural that many commodities will see lowering of prices. In the coming days, we will try that sooner we complete the roadmap and implement it," he said.
Unveiling the roadmap for GST roll out, Adhia said the government is looking at April 1, 2017, as the target date for implementation and 60,000 officers would be trained on GST laws and IT infrastructure framework by March next year.
Revenue Secretary Hasmukh Adhia listed seven challenges, which needed to be dealt with for smooth implementation of the Goods and Services Tax (GST).
These challenges include: calculation of revenue base of Centre and states and compensation requirements, structure of GST rates, list of exemptions, forming of consensus on Model GST Bill, threshold limits, compounding limits and cross empowerment to mitigate ill-effects of dual control.
Adhia said the GST rate structure should be such that it should not be obnoxious, which would meet the revenue requirement of state and Centre.
Citing media reports which gave examples based on 18 per cent GST rate, he said: "I would advice that these are premature calculation, particularly in items like car."
Jaitley said a balance will have to be created by the GST Council between states' need for funds for developmental activities as well as ensuring that the incidence on common man comes down.
"On almost 60-70 per cent of commodities on a weighted average you are paying 27 per cent plus a large number of small taxes. Some of the states have 30-32 per cent tax rate.
The guiding principle laid by the Empowered Committee (of state finance ministers) is this rate has to come down," Jaitley said.
A panel headed by Subramanian had last year suggested 16.9-18.9 per cent 'standard' rate 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.
While the CEA has suggested a tax band, states want a rate of 22-24 per cent.
Subramanian said: "At 27 per cent it is totally self-defeating... up to 18-19 per cent there will be minimal impact on inflation and if it goes to 22 per cent there will be a few basis point increase."
Jaitley said the Chief Economic Advisor believes that a more reasonable rate is possible, but some states have a contrarian view.
He further said the government will try to roll out GST quickly. "Now which is the date by which we will be able to make it will have to be seen. It's always good to set stiff targets and try and meet them rather than have no targets at all".
When asked if the existing cess and surcharges would be subsumed in GST, Jaitley said: "Subsuming of taxes is the first power of the GST Council, the Council will decide that the taxes to be subsumed... That is a factor which will be factored in when they fix the rate".
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