The Centre is likely to propose a four-tier tax structure under the goods and services tax (GST), with a peak slab of 26 per cent. Almost 20-25 per cent of all taxable goods, including those consumed by the middle class, could come under the peak rate.
The idea is to arrive at a common ground with the states that are concerned over revenue loss.
A discussion paper to be presented at the three-day GST Council meet that begins on Tuesday is believed to have proposed a standard rate of 18 per cent.
“We are currently looking at four tax slabs, with the highest incidence of tax at 26 per cent. It is lower than the 40-per cent rate proposed for very limited demerit items (by a committee led by the Chief Economic Adviser, Arvind Subramanian). A lower rate of 26 per cent can be imposed on more items. This will address concerns of the states, too,” said a government official.
The states are pitching for a standard rate of 22 per cent, while the Centre has pressed for one of 18 per cent. The lowering of the top slab by incorporating more items may act as a middle-ground for the Centre and the states.
This will be the third GST Council meeting since its incorporation in September. The Council is chaired by Finance Minister Arun Jaitley, with state finance ministers or other representatives as members.
The GST panel, chaired by Subramanian, had proposed a “sin tax” of 40 per cent on limited demerit items such as aerated drinks, luxury cars, pan masala, tobacco and tobacco products.
This sparked protest from the aerated drinks sector with Coca-Cola arguing that the 40 per cent tax would leave the company with no option but to shut down certain factories.
Currently, aerated drinks with added sugar draws a central excise duty of 18 per cent and a state value added tax of 12.5 per cent, making the total indirect tax 30.5 per cent. The Subramanian panel recommended a low rate of 12 per cent for certain items, a standard rate of 17-18 per cent for a majority of items.
According to official sources, the 26-per cent rate might be imposed on big cars, besides other premium or luxury items.
Sources also did not rule out the possibility of another slab over 26 per cent for luxury cars.
Discussions were still on whether the 40-per cent rate should remain for luxury cars as proposed by the Subramanian panel.
“The multiple tax slabs will open a Pandora’s box under the GST regime. More the tax rates, more the classification issue. There will be confusion in terms of how these will work,” said Bipin Sapra of EY.
Praveen Khandelwal, secretary general, Confederation of All India Traders, said too many tax slabs would not only distort the single-tax GST fabric but will also lead to complications, making voluntary compliance a difficult task.
Besides GST rates, the three-day GST meeting would likely discuss service tax administration and central registration issues.
Although states had agreed to the dual control mechanism initially, which involved the Centre administering all 11 lakh service tax assesses till the time states develop competence, in the last meeting they raised concerns about the agreed mechanism.
The states did not want to lose administrative control over service tax imposed by them on restaurants and entertainment. They also said it was hard to distinguish between goods and services in sectors such as construction.
The Centre is also likely to pitch for central registration for telecommunication and the banking sector in the meeting, as opposed to multiple registrations in each state.