As the head of the GST Council, Jaitley’s mandate was to ensure that states agree to a formula to determine a compensation rate in case of a revenue loss after moving to the new system. On Wednesday the council will discuss the most contentious issue – tax rates.
Five alternatives of GST rate structure were debated by the GST Council. A four-slab structure of 6, 12, 18 and 26 per cent with a cess on the highest band for ultra-luxury goods, proposed by the Centre, was hotly debated. The Council also examined the demerit of items like tobacco in a GST regime.
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, sources in the Council said. With regard to compensation for states, 2015-16 would be taken as the base year for calculating revenue, assuming a long-term growth rate of 14 per cent.
Early this year, a panel under the Chief Economic Adviser Arvind Subramanian recommended a revenue-neutral rate of 15-15.5 per cent, with a standard rate of 17-18 per cent to 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 both Centre and states.
“States will be fully compensated upto a period of five years for any potential revenue loss,” Arun Jaitley said. He also said that the Council had come to an agreement on area-based exemptions. This would decide how the 11 states – 8 northeastern and 3 hill states – would be assessed under the new regime.
The council also agreed that tax exemptions given by these states would act as an incentive to the industries. This, however, would be assessed in the calculation as revenue loss for the State which would then be compensated by the Centre, said Jaitley.
The objective, he clarified, is to ensure that the rates do not lead to a spike in the inflation numbers. Meanwhile, speaking on the sidelines, Kerala Finance Minister indicated that there could be four slabs of GST rates set by the government.
GST is one of the major financial reform initiatives to stitch together a common national market, dismantle fiscal barriers among states and consolidate local and central duties into a single tax.