The Goods and Services Tax (GST)

GST Bill: Government looks forward to decrease additional tax and compensate the states for 5 years.

The following seven days will be quite challenging Phase in Rajya Sabha as GST Bill is in critical stage as it is proposed to implement GST in April 2017.

There are several reasons which had prevented the passing of GST Bill in the upper house. Out of these some factors were the political agendas which were hidden and other visible factors can be best understood from analyzing the following demands of the Congress Party which is right now the single largest party in the upper house.

India moved a step further to implement the GST when the government agreed on Wednesday to reduce the contentious 1% tax on manufacturing and wholly compensate the states for 5 years for all potential losses suffered after new system comes into force.

Featured_Image4What were the demands of Congress?

There were 3 demands of the congress party:

  1. With a view of benefiting the states which are involved in manufacturing industries, Congress wanted to abolish proposed additional Entry tax by 1%.
  2. To clearly establish a ceiling limit of 18% rate of GST in the constitution.
  3. To draw up an independent authority to settle the Goods and Services Tax dispute headed by a judge.

What the government wished for?

The government already has given its consent to 2 demands:

  1. To establish authority to settle GST dispute.
  2. Abolishing additional Entry tax of 1% on 27th of July, 2016 in one of its cabinet meetings.

On the other hand, the government is not giving consent to consider the third demand to include a ceiling limit of 18% in the GST rate as it says this rate cannot be easily incorporated in the constitution.

What can be the impact if Entry tax is dropped by 1%?

After conducting various meetings for around a decade, by the collective efforts of experts, various organizations and committee led by Dr. Aravind Subramanian,  it was agreed to settle with RNR (Revenue Neutral Rate) the rate between 17% to 18%.

It was duly recommended by making a provision of 1% Entry tax but here the petroleum sector was outside the scope of RNR.

What is Revenue Neutral Rate?

Revenue Neutral Rate refers to the single rate which helps in preserving the revenue at desired levels. It is that single rate which slowly gets converted into full rate structure depending on various exemptions allowed by different policy choices made. It decides what commodities are to to be charged at a lower rate and what commodities with a higher rate.

The RNR can be clearly differentiated from the “standard rate” which is proposed to be given in the GST Regime which is applied to all the services and goods whose taxation policy is not clearly defined in any act or law. So, typically most if the goods and services are taxed at a standard rate,although it may be noted that it need not be a thumb rule (compulsory rule) to charge a standard rate.

So basically RNR is that rate where both state government and the central government will incur loss from the viewpoint of collection of taxes in order to earn revenue.

 

 

 

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