CEA Arvind Subramanian defends GST rates, quells fears on 'sin' tax

New Delhi: Chief Economic Advisor Arvind Subramanian Monday defended a three-rate structure for GST, including a demerit or 'sin' tax of 40 percent on products like tobacco and luxury cars, saying the recommendation is based on the current tax structure.

The panel headed by Subramanian had on Friday recommended a three-rate goods and services tax (GST) structure of 12 - 17/18 - 40 percent, the last category being for luxury cars.

He said currently many of the luxury goods "are already taxed at very high rates" and the recommendations are "just a status quo".

"I do not think there should be any concern on that," he said, adding that the panel has recommended "a very narrow list of things" for the so-called sin tax.

Stating that his committee was in favour of keeping such a list limited with clearly-defined items, he said the issue will be discussed in the GST Council.

"Our recommendations on the demerit rate are very much based on what happens currently. De facto, some of these goods are taxed at close to what we are recommending. So, we are not changing anything," he said.

The panel has not increased any existing tax or added more goods. "We are just codifying the status quo," he added.

On recommending abolishing the proposed 1 percent additional levy over and above the GST rate on inter-state movement of goods, he said the abolition is necessary to realise the mission of Make-in-India, which essentially can be done by "Making-one-India".

Giving states powers to levy 1 percent additional tax over and above the GST rate will "favour production overseas than production in India".

"... We do have some illustrative analysis and calculations in the report, which show that by and large the manufacturing states are also going to be big consumers of services," he said.

Defending the panel recommendation of not including the GST rate in the Constitution Amendment Bill, Subramanian said a look around the world shows that the minute details of tax policy should not be put in any Constitution for a number of reasons.

"First, these are details and choices that have to be made via political process. Second, if you cast these things in stone, they become irrevocable. When at some future point suddenly circumstances change radically, it can lead to huge problems. That is why it is wiser to leave it to the political process," Subramanian explained.

He believes that overall the impact of GST on inflation is going to be "very minimal".

The panel recommended a range for revenue-neutral rate at 15-15.5 percent and standard rate at 17-18 percent as it was "not possible to say with a degree of confidence" that one particular rate is the right rate, he said.

The recommendation to bring petroleum, alcohol, real estate and electricity under the ambit of GST is owing to the consideration that "the tax base has to be as wide as possible".

"Therefore, the rates are as low as possible because it is good for the consumer, it is good compliance, it is good administrative efficiency. That is what we should work towards," he said.