CEA Arvind Subramanian at the Idea Exchange in New Delhi. (Express Photo: Praveen Khanna) CEA Arvind Subramanian at the Idea Exchange in New Delhi. (Express Photo: Praveen Khanna)

Even as the debate about the optimum level of goods and services tax (GST) rate continues, Chief Economic Adviser Arvind Subramanian said that a high standard rate, only to compensate states for their potential revenue loss, will not be desirable. Describing compensation as a temporary phenomenon, Subramanian said the money for compensating states would have to be found “elsewhere in the Budget.”

“To have (a) standard rate permanently higher because of a temporary thing doesn’t seem to be good policy. I think it is stuff like that which will be discussed going forward,” Subramanian said at the Idea Exchange organised by The Indian Express.

Subramanian said that the amount of compensation for states is not known, but it is a temporary phenomenon, which will be much more short lived than what people think and therefore, the permanent structure of GST should not be burdened with the temporary phenomenon of compensation.

“There is great fear of unknown for states, so they say they want higher rates,” he said, adding that the states will get to tax services and will be the biggest beneficiaries from the proposed indirect tax regime.

The Chief Economic Adviser, who had last December suggested a revenue neutral rate of (15-15.5 per cent) and standard rate (16.9-18.9 per cent) for the proposed GST, highlighted the huge compliance-related benefits expected from the tax reform once it gets rolled out.

At the heart of the compliance is the IT network, wherein every invoice of every dealer will be captured, with around 3-5 billion invoices expected to be matched online automatically every month, he said.

When asked on the expected impact of GST on CPI inflation, Subramanian said, “When the dust settles, there might be some reductions, there might be some increases, people will focus on the increases.”

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He, however, said going forward there is going to be a check on granting exemptions, which will be finalised after the formation of the GST council.

While acknowledging the challenges of weak private investment, subdued exports and corporate balance sheets problem, Subramanian said a lot has been achieved, describing the passage of legislation relating to monetary policy framework, goods and services tax, Aadhaar and bankruptcy, Monetary Policy framework, GST, Aadhaar Bill and the bankruptcy code as “significant action” and more action is in the pipeline. On a day when RBI in its third bi-monthly monetary policy statement for 2016-17 termed the risks to the inflation on the upside, Subramanian was more optimistic by projecting a benign outlook for inflation.

He said that with a good monsoon and a likely fall in prices of pulses and fruits and vegetables going ahead, inflation is expected to stay benign, which provides scope for easing interest rates.

“In terms of policy I think it’s fair to say that there has been significant action … on the economy itself, I happen to think that exports have bottomed out, the monsoon is looking good and my view is that the inflation outlook is actually not bad at all …,” Subramanian said.

“This is not to discount the challenges. Private investment remains weak, exports still have to pick up, we still have corporate balance sheet problem, hanging over us as a legacy. So challenges remain of course but I think a lot has been achieved and a lot is in pipeline and the outlook is actually good,” he said.

A moderate GST rate, however, won’t be inflationary though more definitive assessment of the price impact of GST on specific commodities can be made only after the council decides the rates and the exemptions. He said the bottom 40 per cent of the population would be “more protected (from inflation) given their consumption pattern and PDS benefits”.

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