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GST Council agrees on compensation formula; rates next on agenda

India’s plans to implement a country-wide Goods and Services Tax (GST) entered the final leg with the Finance Minister Arun Jaitley-headed GST Council agreeing on a formula on Tuesday to compensate states in case of a revenue loss after moving to the new system.

The council will now discuss the tax rates, the most contentious issue, on Wednesday and Thursday.

On compensation to states, 2015-16 will be taken as the base year for calculating revenue assuming a secular or long-term growth rate of 14 percent.

States will be fully compensated till five years for potential revenue loss.

The GST Council has also finalised area-based exemptions and how 11 states—the eight north-eastern states and the three hilly states, will be treated under the new tax regime.

The tax exemptions given by these states as incentives to industry will be counted in the definition of revenue for calculation of revenue loss, Jaitley said after the meeting on Tuesday.

“The objective is to ensure rates will not be inflationary,” Jaitley said.

GST, billed as India’s most ambitious reforms move, will stitch together a common national market, dismantle fiscal barriers among states and consolidate a patchwork of local and central duties into a single levy.

Kerala Finance Minister Thomas Issac, who was also present during the meet, said there could be four slabs of GST rates.

A panel under chief economic adviser Arvind Subramanian has recommended a revenue-neutral rate of 15-15.5 percent, with a standard rate of 17-18 percent be levied on most goods and all services.

A revenue-neutral rate is a single rate at which there will be no revenue loss to the centre and states in the GST regime.

The Subramanian-panel had recommended a three-tier rate structure wherein some essential goods will be taxed at a lower rate of 12 percent; so-called demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products at a higher rate of 40 percent; and all remaining goods at a standard rate of 17-18 percent.

The National Institute of Public Finance and Policy (NIPFP) favoured a standard rate in the range of 23-25 percent if goods are taxed at three different rates—a special rate for precious metals, a lower merit rate for some important goods as well as a standard rate that will be applicable to most goods.

It had also suggested a GST rate of 18-19 percent in case of a single GST rate—that is all goods are taxed at the same rate.

The 13th Finance Commission headed by former finance secretary Vijay Kelkar had suggested 18 percent as a possible GST rate.

The GST Council discussed five alternatives of GST rate structure.

A four-slab structure of 6, 12, 18 and 26 percent with a cess on the highest band for ultra-luxury and demerit items like tobacco being levied was discussed.

Sources said that food items are proposed to be exempt from the tax and 50 percent of the items of common usage will be exempt to keep the inflation under check.