The Centre is set to propose that the rate of tax on gold consumption be doubled under the Goods & Services Tax (GST) regime so as to allow the GST council the elbow room to set a lower standard GST rate.
The government’s main argument in the GST Council, which will start meeting from Thursday, will be that the increase in revenue from gold consumption will provide the necessary cushion for the standard GST rate to be fixed at a level lower than 20 per cent.
The proposal is based on last year’s recommendation from a government committee headed by Chief Economic Advisor Arvind Subramanian. The panel had suggested taxing gold and other precious metals at rates ranging between 2 per cent and 6 per cent. This, the panel had argued, would protect the revenues of the States even if the standard rate of GST was pegged below 20 per cent.
At present, the Centre and States tax precious metals at rates between 1 per cent and 1.6 per cent. Currently, about 70 per cent of goods and services get taxed at an average rate of 27 per cent. To protect their revenues, States have sought that the standard GST rate, which will fall on the bulk of goods and services, be fixed at 20 per cent or higher.
In consultations earlier, some States had expressed concerns that a high rate of GST on gold was not “politically feasible”. However, a system in which the rate on gold was kept low and the standard GST rate was high, would result in poor people ending up subsidising the gold consumption of the rich, a Finance Ministry official said.
“Apart from the desirability of a higher tax on jewellery, which is an item of consumption for the rich, it is also an item which is prone to tax evasion, being a very high-value item,” Revenue Secretary Hasmukh Adhia had said in an interview last month. “The incentive to not report the transactions will be higher if the tax rate on jewellery is very high,” Mr. Adhia had said, underscoring the need for striking the right balance.
Separately, in a review meeting, Prime Minister Narendra Modi issued directions to his office and the Finance Ministry to complete all steps ahead of the April 1, 2017 target deadline for the roll-out of GST, to avoid slippages.