NITI Aayog supports multiple rates, cess under GST

New Delhi: Brushing aside criticism, NITI Aayog Vice Chairman Arvind Panagariya today supported the proposed 4-rate Goods and Services Tax (GST) structure saying it will help in dealing with any possible surge in inflation or revenue loss.

Panagariya also favoured continuation of cess, dismissing criticism that it would dilute the original idea of a single unified rate.

Explaining the rationale behind the proposed four rates under GST, he said: "...Big gains from GST will be because of having a single rate across any given product geographically."

The GST Council is discussing a proposal to have four-slab tax structure for GST with 6, 12, 18 and 26 percent along with an additional cess for luxury and demerit goods.

There is ongoing debate whether GST, which is to be rolled out from April 1 next year, should be a single rate regime or should it have multiple rates.

Earlier in the day, former finance minister P Chidambaram said the proposed multiple rate GST structure will be "disastrous" and nothing more than same old VAT rates in a "new shape".

"We sincerely hope that we do not misinterpret the design of standard, standard minus and plus rates of GST. We can have 20 rates. It will be disastrous and that cannot be GST, it will be fooling the country," Chidambaram told an interactive session with IIM Calcutta students on economic reforms.

Panagariya, on the other hand, expressed the view that under GST, there will be national single tax rate on each product and "that is where the big gains are".

He added: "A lot of people think that they have identified single tax rate across commodities. But the bigger part is single tax rate on every product across entire country. There is no tax theorem that two rates are better than four."

He further said, "If you do a single rate (16 or 18 percent) then some of rates you will have to bring very far off. Obviously, then there will be inflation on those particular commodities (with lower rates of tax). There are products which have 3 percent rate of tax. Those if you take all the way to 16 or 18 percent then there will be inflation implications."

Observing that GST is a process and the country would head towards one tax band, Panagariya said it cannot be done in one go as it would fuel inflation by pushing prices of some of the adversely impacted commodities.

He suggested that four-rate structure will ensure that taxes on bulk of the commodities remain at the same level under the GST regime and have minimal impact on revenue collection.

"This way (having four rates) doing it has an advantage that your tax revenue loss prospects are less. It is more predictable. Even a one percentage point mistake will lead to much bigger impact (on revenue). It (four slabs) will help you to ascertain revenue in the beginning," he said.

On continuation of cess he said, "There is devolution issue. 42 percent (of tax collections) goes to states. Cess is 100 percent with the centre."

He further argued, "Advantage of cess is that it is temporary. It is imposed for specific purpose and can be withdrawn after the purpose is served. If you do it (raise revenue for specific purpose) through increasing tax rates then there would be no obligation to withdraw it. You shall be used to collect that much of revenue."

About meeting GST roll out deadline (April next year) he said: "Government is working towards it and there is no reason why I should believe that it will not happen.

"It's a little bit of race against time but certainly well within the realm if possibility."