Goods and service tax- the case for inclusion of food grains, textils and sugar

Student name: Ms Neha Tewari
Guide: Dr Manipadma Datta
Year of completion: 2012
Host Organisation: Ministry of Finance, Government of India
Supervisor (Host Organisation): Mr Arvind Kumar

---

Abstract:
EXECUTIVE SUMMARY

The taxation of goods and services in India has, hitherto, been characterized as a cascading and distortionary tax on production resulting in mis-allocation of resources and lower productivity and economic growth. It also inhibits voluntary compliance. Though introduction of the Value Added Tax (VAT) at the Central and the State level has been considered to be a major improvement but still it leaves many lacunas behind. Therefore, it is necessary to replace the existing indirect tax system by a new regime which would foster the achievement of the following objectives:

The incidence of tax falls only on domestic consumption and efficiency and equity of the system should be optimized. In addition to that there should be no export of taxes across taxing jurisdictions.

A well designed ‘value added tax on all goods and services (GST) is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass through, and the tax essentially ‘sticks’ on final consumption within the taxing jurisdiction.

It’s a consumption-type GST, which should be a dual levy imposed concurrently by the Centre and the States, both the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) should be levied on a common and identical base.

At present, except the negative list, all goods and services comes under purview of GST. But as far as food grains are concerned there is nothing specifically mentioned for inclusion in GST. Presently 4% VAT can be levied on food grains but generally states do not levy VAT on food grains because of socio-political issues.

As far as Textiles and Sugar are concerned, till 2010-11 they were in the net of Additional Excise Duty (AED), but as per the announcement in budget 2011-12, AED is scrapped on both the items. So from 2011-12 onwards, VAT is to be levied on them till GST is introduced.

Inclusion of all these items will broaden the tax base, which will reduce rate of GST, which will further reduce cost of goods and services and thus reduction in final price. Lower Rate shall also leads to more compliance which will increase government tax collection.

So the scope of the project is to find out the possibilities of inclusion of Food grains, Textiles and Sugar in GST from economic point of view. The inclusion of the same in GST will be considered as a viable option only when, due to this there will be a significant increment in the tax base of GST and further reduction in the rate of GST.

Therefore the scope of the project is to assess the tax base inclusive of Food grains, Textiles and Sugar as well as computation of Revenue Neutral Rate (RNR) of GST. Since the Empowered Committee has used the fiscal year 2007-08 as the base year for calculation of the RNR, thus data analysis is done by using the data of 2007-08 and same methodology is adopted for 2010-11.

As per the Empowered Committee calculations Revenue Neutral Rate as on 2007-08 range from 18%- 20%. However, based on our calculations in 2007-08, if we take account of tax base of food grains at 70% i.e. leaving population under Below poverty line and further leaving 10% population who comes in the margin of BPL, the tax base will increase by Rs.1,33,101 Crores which will make total tax base Rs. 19,16,769crores. Due to this the Revenue Neutral GST Rate across goods and services is expected to be positioned somewhere 16.46% (SGST- 7.68% and CGST-8.78%)

Now as per the data of year 2010-11, it is observed that there is an increment in the tax base from Rs.17, 83,647 Crores to Rs. 28, 33,090 Crores. And due to this RNR is expected to be 15.17% where CGST is 6.85% and SGST is 8.33%.

Now coming to second stage of project i.e. integration of tax base of Sugar and Textiles into GST tax Base on 2010-11 due to scrapping of Additional Excise Duty on them. Three alternative scenarios analysis being conducted for the same, we noticed following:
1. Addition of Tax base of Food grains only: RNR of GST is 14.49% where SGST is 7.95% and CGST is 6.54%.
2. Addition of the Tax Base of Sugar and Textiles only: RNR of GST is 14.43%, where SGST is 7.92% and CGST is 6.51%.
3. Inclusion of Food grains, Sugar and Textile together: RNR of GST is further reduced significantly by 1.35% i.e. 13.82%, where SGST is 7.58% and CGST is 6.23%

As with another modeling exercise, the results of our study are also subjected certain limitations. Revenue Neutral Rate can also be calculated through various methods such as input-output method but for the sake of simplicity and comparative purposes, RNR is calculated with the same and methodology as adopted by Empowered Committee.