High tax rate to top GST council agenda

Centre wary higher tax slab could induce inflation.

Days before the all-powerful GST Council meets to finalise rate structure in the new indirect tax regime, dilemma continues over placing tobacco products and demerit goods like luxury cars under higher tax slab of more than 26 per cent.

Tax experts warned that a very high rate and more items coming under it would take the feel-good factor away from the GST.

While Centre wants the peak rate to be 26 per cent in the four-tier tax structure in the new indirect tax regime covering tobacco products and demerit items, several states especially Rajasthan and Gujarat insist for a fifth tax slab of 40 percent.

An official source told Financial Chronicle that the Centre is wary of higher tax slab of 40 percent in GST as it could result in inflation and have high political cost.

Given justifications for higher tax on sin goods like tobacco, the Centre has proposed a cess over the higher GST rate.

“In case GST causes inflation people would tend to hold the Centre responsible for it while states will get away. The central government is aware of this and would therefore not accede to the demand of keeping any other rate higher than 26 per cent,” he said.

Explaining further the official said that if a higher rate, say 40 per cent, is agreed it will not only apply to tobacco products but many other items will also come under it fuelling price increase. This will create negative perception about the new tax structure and may have an impact on electoral outcome.

Further, states currently levy as much as 62 per cent tax (Rajasthan) on tobacco products given their serious effects on human health to discourage its consumption. A lower rate under GST would not be taken in good taste and state governments may face public ire for it.

The states are pushing for higher tax rate for demerit items for political reasons too. They want to be seen as taxing heavily the rich while seeking to discourage consumption of sin items.

“Too many slabs would be problematic. The higher the rate goes and more products are there under it there would be more issues like evasion and revenue leakage. Eventually, the feel-good factor that will really make economy buoyant will not come in. Because the rates are expected to decrease in the GST we are saying that the economy will be buoyant and GDP will increase,” Bipin Sapra, partner (indirect tax & regulatory services) at EY.

The GST Council, the joint forum of Centre and states, is scheduled to meet on November 3-4 to finalise the rate structure in the new indirect tax regime.

It could not decide the rate structure in the previous meeting because states had varying views over the rates proposed by the Centre and imposition of cess over and above higher GST rate of 26 per cent.

Also, sufficient data was not available to calculate revenue implication of the four-tier tax structure of 6,12,18 and 26 per cent. But now Centre and states have exchanged data and are all set to make headway on the crucial issue. Apart from rates, the issue of administrative control over tax assesses is also on the agenda.