Indeed, 18% is a sensible GST rate; worry that this would be too low is misplaced

Dated 25th November, 2015

A panel chaired by chief economic adviser Arvind Subramanian has reportedly recommended a goods and services tax (GST) rate of 18 per cent. This is less than half the current incidence of cascading indirect taxes on goods. The rate is also the cap that the Congress wants prescribed in the GST law. The government would do well to accept a cap as well as the two other changes the Congress wants: do away with the 1 per cent tax on inter-state sales and resolve tax disputes among the states or between the Centre and the states through a mechanism that excludes parties to the dispute. Continuing with a tax on inter-state sales on which the buyer cannot claim an input tax credit is against the logic of GST. And it is redundant as the Centre stands ready to compensate the states for any revenue loss during the transition.

The Centre and the states must settle for an 18 per cent rate when all taxes imposed on goods and services are collapsed into one. By subsuming most indirect taxes, GST will cut out the cascade of multiple taxes that products bear. It will make production efficient and lower retail prices. If about 60 per cent of the country’s nonagricultural output were to be taxed at 18 per cent, that would yield taxes to the tune of 10 per cent of GDP. Taxes on corporate and personal income along with Customs fetch 7 per cent of GDP right now. Considering that the combined tax collections of the Centre and the states are about 17 per cent of GDP right now, 18 per cent would indeed be more than a revenue-neutral rate. A manufacturer will be able to claim credit for all the taxes paid on inputs, leading to audit trails that will help expand the tax base and capture swathes of tax-evaded income. This, in turn, strengthens the case for a moderate GST rate.

Globally, the average VAT rate is about 16.4 per cent. The European Union has set the minimum standard VAT rate at 15 per cent, even as member-states are free to set their own rates. In India, a task force set up by the Thirteenth Finance Commission had recommended a single rate of 5 per cent for central GST and 7 per cent for state GST. Taking all that into account, a rate of 18 per cent is no way too low.

(This editorial is published in The Economic Times on 25 Nov, 2015)