1) 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.
GST Council agreeing on a formula Today to compensate states in case of a revenue loss after moving to the new system. 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 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.
Last year, a panel headed by Chief Economic Advisor Arvind Subramanian had suggested 17-18 percent as the standard rate for bulk of goods and services while recommending 12 percent for low rate goods and 40 percent for demerit ones like luxury car, aerated beverages, pan masala and tobacco. For precious metal, it recommended a range of 2-6 percent. Finance Minister Arun Jaitley had last week said tax on environment-unfriendly products will be "distinct” from others in the GST framework.
The main opposition party Congress has argued for an 18 percent rate. But state governments are unlikely to agree to this as this would mean deeper revenue loss (of about 12 percent) for them. In all likelihood, the Congress will object to any rate higher than the one suggested by it.
Even if the GST Council discusses in the present meeting it is unlikely that a decision will be taken. Considering the political sensitivities involved, it is going to be a long drawn process, unless the Congress is ready to relent.
2) 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.
As per the proposals, a state can be compensated if the revenue under GST falls short of the average tax earnings in the best three years out of the past five years.
Second, of the five years, two outliers are left out and an average is taken. If the revenue under GST is short of this, then states get compensated.
Third, a base year can be fixed and a particular growth rate decided for all states. If the revenue falls short of that, then the state gets compensated. The base year would be 2015-16.
Another suggestion was on a fixed rate of revenue growth and give compensation, he said.
The Bill seeks to provide full compensation to states for first five years of rollout of the GST regime. Earlier the 100 percent compensation to states was restricted to only first three years. However, the Select Committee of the Rajya Sabha had in its report recommended 100 percent compensation for probable loss of revenue for five years.
3) 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.
While a decision to this effect was taken at the first meeting of the GST Council, at least two states dithered on approving the minutes of the meeting, saying they are not in favour of losing power of assessment of these assessees.