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Indian Panel Suggests Tax Rates for New GST Regime

Posted on January 14, 2016 by Stephanie Soong Johnston

Citing a historic opportunity to implement a "game-changing" national goods and services tax system in India, a government-appointed panel on December 4 made several recommendations for the new regime, including a standard rate of 17 to 18 percent.

The panel, led by Chief Economic Adviser Arvind Subramanian, made its recommendations in a preliminary report submitted to the Ministry of Finance. "Getting the design of the GST right is . . . critical," the report says, according to an MOF release. "Specifically, the GST should aim at tax rates that protect revenue, simplify administration, encourage compliance, avoid adding to inflationary pressures, and keep India in the range of countries with reasonable levels of indirect taxes."

The government has been trying to pass a bill adding two new articles to the constitution to allow for the implementation of a GST system by April 1, 2016. The first article would empower India's federal and state governments to create their own GST legislation, while the second would create a GST council to advise the various governments on related topics, including tax rates and exemptions. The new system would streamline the country's complex tax system by replacing several indirect taxes levied at the federal, state, and local levels. The bill passed through the Lok Sabha, the lower house of Parliament, in May, but stalled in the Rajya Sabha, the upper house, where the opposition Nationalist Congress Party holds a majority.

Finance Minister Arun Jaitley appointed two GST implementation panels in June, the first to handle the progress of information technology preparedness for the GST among all government bodies, and the second to recommend possible tax rates.

The second panel recommended that certain items, such as precious metals, be taxed at a special rate of 2 to 6 percent. The report also suggests a revenue-neutral rate of 15 to 15.5 percent, a sin tax rate of 40 percent that could apply to items such as luxury cars and tobacco products, and a lower rate of 12 percent on essential goods. However, the report doesn't recommend a lower rate for essential services, Jayanta Kalita of PwC India told Tax Analysts.

Other recommendations include eliminating all interstate taxes, throwing out a proposal for a 1 percent additional tax on the interstate supply of goods, and putting alcohol, petroleum, and real estate within the GST's scope. The report also recommends the elimination of exemptions, saying that the broader the scope of exemptions, the less effective the GST will be.

"The nation is on the cusp of executing one of the most ambitious and remarkable tax reforms in its independent history," the panel said. "The time is ripe to collectively seize this historic opportunity."

The panel's complete report will be released on December 7, and the recommendations must be finalized and confirmed by the GST council, Kalita added.

Rajeev Dimri, leader of indirect tax at BMR & Associates LLP, said the recommended standard rate is "hugely welcome," but he noted that the suggested sin tax rate of 40 percent is on the much higher side. "The government's continued action to push the GST bill through has reignited the hopes of the country that the GST may see the light of the day some time during the next fiscal year, if not from April 1 itself," he said. "Doing away with [the] 1 percent additional tax [on interstate supplies of goods] is a welcome move and may pave an easy way for GST to come through."