What does the inclusion of 18% cap on GST rate in the bill signify?

What does the inclusion of 18% cap on GST rate in the bill signify?

There are two important parts of this question that must be separately discussed.

1) Should the rate be included in the bill itself?

The bigger fundamental question here is whether it is appropriate to include the rate in the bill itself. There are three ways in which the rate can be decided by the legislation, here they are -

·         Include the rate in Constitution - If the rate is included in the Constitution itself, then it cannot be changed later. In the event that the rate needs to be changed, we will have to adopt the whole Constitutional Amendment procedure (passing in both houses of parliament with two thirds, and ratification by state assemblies). This is too rigid for something as simple as the rate, which should be easier to change.

·         Include the rate in the GST Act - Another possibility is to include the rate in the Act itself. In this case, changing the rate would then become a matter prone to both houses of parliament with a simple majority. This is easier to implement, but can still be an inconvenience in certain cases.

·         Include the rate in the budget - The rates of income tax, service tax etc are included in the yearly budget of the government. This is most easy to change and therefore might also be subject to manipulation. However, it might also be an important tool for the government's fiscal policy.

Which of these is right? In my opinion, inclusion of rate in the Constitution is an extreme step which does not make sense. This is also the view shared by our Finance Minister -Jaitley rules out including GST rate in Constitution Bill saying that tariffs cannot be cast in stone.

In my view, it makes sense to include a maximum cap in the GST Act, but actually enforce it using notifications. A perfect example is the Central Excise Tariff Act. The rates of excise duty are written in the Act, however, the government can provide special exemptions separately. In that way, the government cannot exceed the maximum permissible rate but can play with the rates below the maximum rate. That makes sense.

2) What is an ideal GST rate?

Another question everybody wants to know is whether there is a single rate that can satisfy all the interested parties in case of GST. In other words, what is the ideal rate of GST? And sadly, there is no single answer to this question. It is theoretically possible to calculate arevenue neutral rate but that would be different for different products. The key challenges are -

1.       Presently, there are a lot of exemptions and concessions given to various products. These products will have a lower revenue neutral rate because of the existing exemptions. But that may not be the case in GST.

2.      The rates of similar products may also vary substantially between one state and another. Some products are promoted in a state while they may be taxed a lot in another state.

To understand the conflicts better, read Why do different states of India have different tax rates? The key issue therefore is that a rate of 18% may be good for some industries and may be bad for others. Also, the same rate of 18% may be good for some products and bad for others.

The ideal rate of GST, therefore, cannot be determined with the goal of keeping the things constant. This is one of those cases where we may want to start with a zero based strategy. Take a blank paper and see what exemptions are really, really necessary and what all can we do away with. In such a scenario, inclusion of 18% rate in the bill itself is a handicap that should not be allowed.

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