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Govt panel accepts most Congress demands. Will the GST bill pass now?

Neeraj Thakur | Updated on: 13 February 2017, 11:50 IST

After months of wrangling between the government and the opposition, the decks have been cleared for the GST to be passed in the Rajya Sabha.

The much-awaited report of a panel led by Chief Economic Advisor Arvind Subramanian on the prospective Goods and Services Tax rate has addressed most of the objections that the Congress had raised.

Also read - Can't make sense of the GST debate? Here's what you need to know

The GST is touted as being crucial to simplifying the tax regime, thereby helping "ease of doing business". Analysts estimate it would increase India's GDP by up to 2%.

What has the panel recommended?

  • A revenue neutral GST rate of 15%-15.5%. At this rate, the central government won't profit from the GST, but it won't lose revenue either. The standard rate has been proposed at 17-18%.

  • Doing away with the 1% additional tax for inter-state goods.
  • Keeping real estate, electricity, alcohol, petroleum products out of GST. This profits states that are reluctant to give up lucrative tax revenue on such items. The panel, however, has suggested that such item be brought under the GST soon.

As a concession to the Congress, Subramanian panel wants to scrap 1% extra tax for inter-state goods

  • For products not covered by the GST, merit tax of 12% and demerit tax of 40% would be levied. Merit tax is levied on essentials such as food products whereas the latter is for luxury items such as high-end cars, tobacco, alcohol.

Will this resolve the deadlock?

The NDA wanted to keep alcohol, petro products, electricity and tobacco out of GST to compensate "manufacturing states" for revenue loss. The Congress wanted a maximum GST rate of 18%. The panel's suggestions allow for both and are, therefore, a trade-off.

The Congress is yet to react to the report, but economists and industry people are largely happy. The manufacturing sector, in particular, has been lobbying hard for the GST as a simplified tax rate is expected to bring down the cost of goods.

Also read - Here are 10 quick facts about the Goods and Services Tax that you must know

"The revenue neutral rate of 15%-15.5% is really good. We were expecting it to be 20%-22% which would have put the government in a difficult situation," said Surjit Bhalla, the chairman of Oxus investments, an emerging market advisory firm.

15%-15.5% rate is good. We were expecting 20%-22%. Now, NDA can agree to Congress' demands: @surjitbhalla

"Now the government has the room to agree to the demands of the Congress without loosing its revenue."

Sanjay Bhatia, the managing director of Hindustan Tin Works, said, "The industry wanted the rate to be on the lower side, about 13-15%, since the 12th finance commission had recommended a rate in that range."

"However," he added, "even a standard rate of 17%-18% is good. It should now allow the bill to be passed."

Not everybody is impressed with the Subramanian panel's recommendations though.

Criticism of the report

"The idea of the GST is to have a single rate of taxation for all products. By suggesting so many rates in the range of 12%-40% under different categories, the panel has killed the idea of the GST," said the economist Ashok Desai.

"We might as well continue with the current system as we even now have taxes based on categorisation of products," he added.

It remains to be seen how the NDA regime will address such concerns when, and if, it adopts the report.

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First published: 5 December 2015, 12:55 IST
Neeraj Thakur @neerajthakur2

As a financial journalist, his interface with the two dominant 'isms'- Marxism and Capitalism- has made him realise that an ideal economic order of the world would lie somewhere between the two.

Senior Assistant Editor at Catch, Neeraj writes on everything related to business and the economy.

He has been associated with Businessworld, DNA and Business Standard in the past.

When not thinking about stories, he is busy playing with his pet dog, watching old Hindi movies or searching through the Vividh Bharti station on his Philips radio transistor.