Relevance and use of the article in UPSC prelims and mains examination: Dear aspirants,Tax reforms is the much debated topic in indian economy. And unified tax rate in indirect taxes is demand for smooth flow of business across country. A lot has been exercised about it but no consensus is made yet. The recently concluded GST council meet has finalised the compensation formula for states for potential revenue loss, converging at an assumption of 14 per cent revenue growth rate over the base year of 2015-16. Lets know about the pros and cons of this formula.
- The three-day meeting of the goods and services tax (GST) council ended on Wednesday with no consensus on the GST rate. The Centre had proposed four different rate structures at the council's previous meet a day earlier. It worked out a compensation formula for states and is now bracing for a testy debate on rates.
- The Union Government has proposed a four-slab rate structure for the new indirect tax regime i.e. Goods & Services Tax (GST) ranging from 0 to 26 per cent.
About GST Council:
- As per Article 279A of the Constitution, GST Council will be a joint forum of the Centre and the States. It shall consist (i) Union Finance Minister (Chairperson). (ii) The Union Minister of State (MoS) in-charge of Revenue of finance (Member) and (ii) The Minister In-charge of taxation or finance or any other Minister nominated by each State Government (Members).
Functions of GST Council?
- The functions of GST Council are mentioned in Article 279A (4) of the Constitution. The Council will make recommendations to Union and States on important issues related to GST, like (i) Goods and services that may be subjected or exempted from GST. (ii) Model GST Laws. (iii) Principles that govern Place of Supply, threshold limits, GST rates. (iv) GST rates will including the floor rates with bands and (v) Special rates for raising additional resources during natural disasters/ calamities, special provisions for certain States, etc.
Things you need to know about central government proposed four-rate structure.
- The comprising two standard rates - 12 per cent and 18 per cent - and the lower rate of six per cent for essential goods.
- The Centre has proposed a tiered rate structure with the levies varying from four per cent for commodities like gold to 26 per cent plus cess on so-called sin goods.
- The council is looking at a peak rate for demerit goods such as ultra-luxury items, tobacco products, pan masala - as well as environmentally-harmful products in order to equalise the levy to the current level of tax.
- The proposed standard rates extend to a majority of the taxable goods, while the lower tax slab of six per cent includes a five per cent value-added tax levied by the states, but no excise duty is levied by the Centre.
- However, the Centre seems caught on the wrong foot after it proposed a cess on sin goods to fund the compensation to be paid to states for losses arising from a transition to GST. It is likely to emerge as a key point of disagreement between the Centre and the states as the latter have always opposed the levy of central cess excluded from the divisible pool of taxes.
- Four alternative options for rates have been worked out by the Centre. The finance minister said the rate structure would guard against inflationary pressures and revenue losses to the exchequer. Around 50 per cent of the items in the retail inflation basket will be exempted from GST.
- The Centre pegs the total compensation to states for losses arising from a transition to GST at around Rs 50,000 crore in the first year.
- The cess will be levied over and above the 26 per cent GST rate, as per the Centre's proposal.
Some more aspects:
- Tax rate: This is the most important and vexed issue as the prices of goods and services that will come under GST are dependent on it. The key challenge is to arrive at a consensus on the rate, that will be revenue neutral for the states and also is agreeable for all the political parties.
- Compensation formula: This too is a likely to be difficult one to crack. At the first GST Council meet, 3-4 alternatives were discussed but a decision could not be reached.
- Service tax assessment: The Council will also deliberate on the vexed issue of the Centre retaining power to assess 11 lakh service tax filers under the new dispensation.
The merits of the structure:
- The biggest thing could be that inflation is likely to be contained., one of the concerns many experts have raised with regards to GST implementation has been that the new tax reform may push up inflation rate as services are likely to get a higher tax.
The demerits of the proposal:
- First of all, will the Congress agree to this kind of structure? The party has been arguing for capping the GST standard rate at 18 percent, which it says is the "appropriate rate". With the new structure proposal capping the rate at 26 percent and also adding a cess on top of it, this is unlikely to pass the muster.
- The cess is already attracting opposition.
- "It is likely to emerge as a key point of disagreement between the centre and the states as the latter have always opposed levy of central cesses that are excluded from the divisible pool of taxes
- The Finance Minister said that all decisions of the GST Council are being taken with consensus. “So far between the last two meetings and today, we have been, one by one, reaching a consensus on each issue and so far, all decisions have been taken by consensus. And the object is to keep on discussing and re-discussing even when there is no agreement on the first instance and take as many decisions possible by consensus and, to the extent possible, avoid a situation where we have to put an issue to vote. So far, we have achieved that objective,.
Question for prelims:
Consider the following statements about GST council.
- As per Article 279A of the Constitution, GST Council will be a joint forum of the Centre and the States.
- It shall consist (i) Union Finance Minister (Chairperson). (ii) The Union Minister of State (MoS) in-charge of Revenue of finance (Member) and (ii) The Minister In-charge of taxation or finance or any other Minister nominated by each State Government (Members).
- The functions of GST Council are mentioned in Article 279A (4) of the Constitution.
Which of the following statement is/are correct:
- 1 and 2
- 2 and 3
- 1and 3
- All of the above.
Question for mains : Tax reforms is a much debated topic while discussing economic reforms. Do you think roll out of GST will sort out most of the issues. Discuss in the lights of recently concluded GST Council meeting.
- Discuss about tax reforms
- Its importance in indian economy.
- Discuss about GST, GST council and its functions.
- Formula proposed by GST council.
- Its merits and demerits.
- Suggestions and solutions.