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GST council decides on compensation for states

The Goods and Service Tax (GST) Council, on Tuesday, decided on a compensation of 14 per cent for states, which will face loss of revenue and will now decide on four-slab GST rate proposal over the next two days.

The Council, which is headed by Finance Minister Arun Jaitley and comprises of the finance ministers of states, made a proposal of a two-tier standard GST rate of 12 per cent and 18 per cent under which about 70 per cent of taxable goods will be covered.

As per the proposal , the highest slab will be 26 percent, which will cover some 25 per cent of the taxable goods including consumer durables and vehicles. For ultra-luxury items, like high-end cars, and for items such a tobacco, cess above the 26 per cent rate will apply, Revenue Secretary Hasmukh Adhia said after the meeting. The proceeds from such cess, estimated to be around Rs 50,000 crore if this proposal is accepted, will be exclusively used by the centre to compensate states, he added.

Items which are currently exempt but attract a 5 per cent value-added tax will come under the lowest bracket of 6 per cent, Adhia said and added that services will be either in the 12 per cent and 18 per cent. 4% GST rate was suggested on gold

Jaitley told reporters after the meeting of the all-powerful council that it had reached a consensus on the way states would be compensated for any loss of revenue from implementation of the new indirect tax regime from April 1, 2017.

Base year for calculating the revenue of a state would be 2015-16 and secular growth rate of 14 per cent would be taken for calculating the likely revenue of each state in the first five years of implementation of GST, Jaitley said.. States getting lower revenue than this would be compensated by the Centre.

"The principles of fixing the rate would be; it should be inflation neutral, states and centre continue with their expenditure and tax payers are not burdened," Jaitley said.

Once the rate structure is finalised, the technical group of state and central tax officers will discuss which item would fall in which tax bracket.

"So far between the last two meetings and today, we have been one by one reaching a consensus on each issue and so far all decisions have been taken by a consensus. And the object is to keep on discussing and re-discussing even when there is no agreement on the first instance and take as many decision possible by consensus and to the extent possible avoid a situation where we have to put an issue to vote. So far we have achieved that objective," he said.

Food items are proposed to be exempt from the GST and 50 per cent of the items of common usage will be exempt to keep the inflation under check. The lower rates would be levied on essential items and the highest for luxury and demerit goods.

Kerala Finance Minister Thomas Issac said his state government wanted the highest rate to be fixed at 30 per cent so that common man items can either be exempt or levied with lower tax rates. The compensation to states would be "limited to taxes subsumed into GST," he said.

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