The Cabinet's approval on Monday to set up the GST (Goods and Services Tax) Council, after the President's approval for the constitutional amendment last week, marks the beginning of the toughest phase in the road to final implementation. The government has set a deadline of 1 April 2017 for the rollout of the indirect tax reform.
This is the council which will have to do the complex job of arriving at a consensus GST standard rate, for which there is no real consensus between states, central government and Congress-led opposition parties till this point.
States, fearing revenue loss, want to set the rate as high as possible, above 20 percent, while main opposition party, Congress, is adamant on 18 percent GST rate. This would mean a difficult exercise for the council since majority states, including the Congress ruled ones, need to agree on the rate part for smooth implementation. How will the Narendra Modi government manage this tug of war is something one needs to wait and watch.
To meet the April deadline, the GST rate needs to be agreed upon and supporting legislations -- central, integrated and state GSTs -- have to be passed in the coming winter session of Parliament. Also crucial is laying out the technology infrastructure to migrate to the new regime. The GST is designed to subsume several state levies into one and bring in clarity to the investor community with respect to country's tax regime.
As Firstpost noted in an earlier article, the GST standard rate is crucial since it will broadly be effective for around 70 percent of goods and services and there is no way all can agree on one GST standard rate. But, the ideal rate, as the government's chief economic advisor (CEA) Arvind Subramanian pointed out time and again is fixing the standard rate closer to 20 percent.
This is because, currently, the weighted average of the central and state level taxes, in many cases comes to 28-30 percent. About 80 percent of goods attract 12.5 percent of central excise duty while at the state level 55 percent of items are charged with 14.5 percent VAT or sales tax.
Thus, the weighted average of the two in 65 percent of the items comes to 27 percent. Now, add state cess, Octroi and entry tax takes, the final figure goes to 30 percent. One needn't be surprised why states are fighting tooth and nail to set te rates higher.
The Congress party's demand to cap the rate at 18 percent in the law is aimed at ensuring the aam aadmi doesn't get overly burdened with a too high GST rate. Besides, the Congress camp realises that it will continue to have a say in the GST affair if the government is pushed again to reach out to the opposition parties again on the rate issue.
Remember, the Congress party decided to support the GST constitutional amendment in Rajya Sabha, where it has clear domination, after running out of all options to delay the process politically. Even at this stage, it wouldn't want to give the Narendra Modi-government an easy win on the landmark tax reform.
Once the issue of GST standard rate is resolved before the Winter Session and broader contours of the central GST law is agreed, the rest is technicality. An April roll out is a possibility then. Else, the process can get delayed in a crucial election year. Fixing the standard rate is a fire test for the GST Council in every sense.