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III. CURRENT STRUCTURE OF INDIRECT TAXES: HIGHLIGHTS
3.1 This section describes briefly the structure of current rates of domestic indirect taxes at
the Centre and the States. The key takeaways are that the current tax structure is highly complex,
highly leaky (riddled with exemptions in goods that we estimate to be about 2.7 per cent of GDP
for the Centre and States together) characterized by significant differences between the Centre
and the States, and by a rate structure that does not confirm to what the evidence suggests might
be good policy. The GST, therefore, affords a unique opportunity to simplify and rationalize the
structure and also eliminate serious anomalies to make it consistent with policy objectives (see
paragraphs 5.56 to 5.60 and Box 3).
3.2 The details, also summarized in the Table 4, are the following:
Centre
3.3 In relation to goods, the Centre has a very complicated tax structure (Table-4), more
complex than that of most of the States, characterized by:
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a multiplicity of rates, including central excise (the most important), cesses,
countervailing and special additional duties;
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a multiplicity of central excise rates-8 ad valorem and several specific rates;
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extensive exemptions, amounting to about 300 items compared to say 90 for most of
the States. These exemptions amount to about 1.8 lakh crore, amounting to about 1.5
per cent of GDP;
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an incomplete base that stops at the manufacturing stage; and
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an exemptions threshold of 1.5 crore with exports and exempted goods not counting
towards the threshold
3.4 In relation to services too, the Centre has a complicated rate structure. Although there is
one statutory rate, in practice, there are 10 other rates because of so-called “abatement” which
amounts to fixing a rate different from the standard rate and not allowing further input tax
credits. Abatement is necessitated in some part because of uncertainty in the base, and
specifically being unable to distinguish “goods” from “services.” The exemptions threshold is Rs. 10 lakh.
3.5 At the Centre, there is incomplete provision of input tax crediting for goods, and
incomplete cross-crediting between goods and services.
States
3.6 In relation to goods, the States have structures characterized by:
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a base that is complete in extending all the way to the retail stage
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an exemptions threshold that varies across States between 5 and 10 lakh with a
provision for “compounding” that also varies across States in design9
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a multiplicity of rates, including the VAT but additional taxes on inter-state trade
(octroi, entry tax)
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fewer VAT rates (4 plus) and fewer exemptions (than at the Centre), with both rates
and exemptions varying across States. On exemptions, there is both a set that is
broadly common to all States and some state-specific ones like agriculture equipment,
aquatic feed, cereals and pulses are mostly common across the States whereas Agate
(Akik) stones and articles are state specific.
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a standard VAT rate for goods that in most of the States is typically about 12.5-15 per
cent (compared with the standard rate of 12 per cent at the Centre)
Table 4: Summary of India’s Indirect Tax System
|
Type |
Base |
Number of
Rates 1/ |
Rates (%) 2/ |
Base (%) |
Collections(%) |
Average rate (%) |
Description of Commodities xx/ |
Threshold 3/ |
Exemptions |
|
Goods 5/ |
|
|
Standard |
Lower |
Standard |
Lower |
Standard |
Lower |
Base-weighted |
Collections-weighted |
Exempted |
Lower rate |
Higher rate |
|
Number 4/ |
Value |
|
Centre Excise) |
manufacturing |
8 |
12.0 |
6.0 |
59.2 |
39.6 |
84.9 |
11.1 |
8.4 |
11.7 |
Food |
Textiles, mobile
phones;
fertilizers;
some
intermediates |
Tobacco,
petroleum
products,
automobiles,
aerated
water |
1.5 crores |
300 |
1.8
lakh
crore (a) |
|
States (VAT) |
up to retail |
3+ |
12.5-14.5 |
4-5.5 |
28.5 |
67 |
32.8 |
54.8 |
7.5 |
9.6 |
Food, goods
of local
importance |
Intermediates;
capital goods;
gold & precious
metals |
Alcohol,
petroleum,
tobacco |
5-10 lakhs |
90 |
1.5
lakh
crore(b) |
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centre |
negative list |
11 |
12.4 |
4.1 |
65.2 |
34.8 |
86.2 |
13.8 |
9.4 |
11.2 |
Education,
health,
public
services |
construction,
work contract,
restaurant,
transport, life
insurance |
|
10 lakhs |
|
|
|
States 7/ |
|
None |
None |
|
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|
|
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1/ Number of ad valorem rates. There are also numerous specific rates on goods charged by the centre. For services, there is one standard rate and 10 abatements.
2/ At the centre, there are 2 lower rates which are akin to a turnover tax; the states levy a lower rate of 1 percent on gold; the center levies higher rates on luxury xars and aerated drinks
3/ Does not apply to exports and exempted goods for goods at the centre
4/ Approximate; precise amounts vary by state. Exemption lists are not identical across states.
5/ Other excises on goods include cesses, countervailing duties and special additional duties (at the Centre) and octroi (in the States).
6/ Incomplete provision of input tax crediting for goods, incomplete cross-crediting between goods and services.
7/ Authority to tax services rests with the Centre but states tax services de facto, e.g. restaurants.
xx/ negative list of services includes health care services, veterinary clinic, charitable activities (under section 12AA of the Income tax Act, 1961) and others.
(a) From tax expenditure statement.
(b) Estimated by the committee
(*)=based only on Gujarat data Source: Compiled by Committee.
1.5 The
Indian GST is expected to represent a leap
forward in creating a much cleaner dual VAT
which would minimize the disadvantages of
completely independent and completely
centralized systems. A common base and
common rates (across goods and services) and
very similar rates (across States and
between Centre and States) will facilitate
administration and improve compliance while
also rendering manageable the collection of
taxes on inter-state sales. At the same
time, the exceptions—in the form of
permissible additional excise taxes on sin
goods (petroleum and tobacco for the Centre,
petroleum and alcohol for the States)—will
provide the requisite fiscal autonomy to the
States. Indeed, even if they are brought
within the scope of the GST, the states will
retain autonomy in being able to levy top-up
taxes on these “sin/demerit” goods.
1.6 Provided it can be reasonably well-designed, the Indian GST will be the 21st century
standard for VAT in federal systems.
1.7 It is, therefore, imperative to ensure that the design and implementation of this policy is
done right. And, one important, perhaps critical, dimension of this is the level and structure of
tax rates on which this Committee has been asked to make recommendations.
Notes:
1 Compounding refers to the exemption of firms from the VAT chain; instead they are charged a small turnover tax
without allowing for any input tax credits
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