GST rate at 20% good for industry, consumers: Experts

The GST rate of 20 per cent, as suggested by a Parliamentary Committee, would benefit the industry and will also not be a burden on consumers, experts say.

The Rajya Sabha Select Committee has suggested that the Goods and Services Tax (GST) rate should not go beyond 20 per cent as higher rates could fuel inflation and erode the confidence of consumers in a new indirect tax regime proposed to be rolled out on April 1, 2016.

Internationally, the GST rate ranges from 16-20 per cent. However, there are some exceptions like Japan, Australia and Germany, where the rates are 8 per cent, 10 per cent and 23 per cent, respectively.

"GST rate at 20 per cent is a practical proposition. It will help the manufacturers who currently have to pay multiple taxes which goes up to 25 per cent. Also, with the widening of tax base, the Government will stand to gain in the medium to long term," PwC Partner (Indirect Tax) Amit Bhagat said.

He further said that Service Tax, which currently is at 14 per cent, will go up to 20 per cent, but the real incidence would be less on account of more credits being available.
The Committee report, which was tabled in Rajya Sabha yesterday, said: "To start with India's GST rate should not go beyond 20 per cent for standard rate and perhaps 14 per cent for reduced rate". The final rate, however, would be decided by the GST Council.

It further said the GST Council need not go strictly by the Revenue Neutral Rate (RNR) for fixing the GST rate because "a high GST rate in line with the high RNR would definitely lead to high inflation. India cannot afford to have high inflation at this stage of economy."
The Revenue Neutral Rate is the one at which there will be no revenue loss to the states after GST implementation.

KPMG India, Head (Indirect Tax) Sachin Menon said both Centre and states would be able to collect more revenue at 20 per cent rate as the loss in manufacturing taxes would be more than made up by the gains in Service tax realisation.

"GST rate at 20 per cent should be acceptable to consumers," Menon said.

A sub-committee of Empowered Committee of State Finance Ministers on GST had earlier suggested 27 per cent RNR. But the rate is being reworked by the sub-committee in view of taxation of petroleum products as also the 1 per cent additional tax which states can levy as part of the GST roll out.

While liquor has been completely kept out of the GST, petroleum products like petrol and diesel will be part of the new regime from a date to be decided by the GST Council, which will have two-thirds of its members from states.

All decisions in the Council will require 75 per cent votes.

Select Committee in its report has said that the implementation of GST in other countries has shown that the GST rate was a crucial factor in earning the trust of consumers.

"If the GST rate is kept high, it will surely erode the confidence of the consumers badly and may lead to high inflation," the Committee said.

The GST Council should opt for broad based and moderate rate as it is an essential feature of a good taxation system as far as possible multiplicity of taxes must be avoided, it added.

The GST Council, which will be headed by Union Finance Minister, and have state Finance Ministers as members, would be formed after the Constitution Amendment Bill is passed by Parliament.