The Goods and Services Tax Council met on Tuesday and discussed the rate bands for the new regime, among other things, PTI reported. The Council, headed by Finance Minister Arun Jaitley, also took up the issue of compensation to states for any loss of revenue from implementation of the new indirect tax system. The new system will come into effect from April 1, 2017.

On the first day of the three-day meet, the Council discussed a four-slab rate band structure with the lowest rate of 6%, to be imposed on essential items, and the highest rate of 26% for luxury goods and demerit items such as tobacco, cigarettes, aerated drinks, and polluting items. The Council also discussed standard rates of 12% and 18%. The Council believes that the cess will help create a Rs 50,000-crore fund that can be used to compensate states for any loss of revenue. It proposed exemption of food items and 50% of items commonly used from the purview of the GST.

Jaitley said the base year for calculating the revenue of a state would be 2015-16. The government would take the secular growth rate of 14% to calculate each state’s revenue for the first five years after the new taxation system was implemented. The Union minister said that the Centre would compensate states with lower revenue. The Council also discussed five alternatives of GST rate, however, no decision was taken in this regard.

The rate band has been a contentious topic between the Centre and the states. Kerala Finance Minister Thomas Issac has reportedly demanded that the highest rate be fixed at 30% so that items that are commonly used can be kept out of the GST’s ambit or levied with lower cess. He said, “The compensation to states would be limited to taxes subsumed into GST."

Jaitley said, "The principles of fixing the rate would be that it should be inflation neutral, states and Centre continue with their expenditure and tax payers are not burdened." The Council is expected to decide on the rate structure on Wednesday, after which the Council will allocate items to tax brackets.

Revenue Secretary Hasmukh Adhia said that less than 10% of the taxable goods would fall in the lowest rate bracket, while 70% of the taxable base would come in the lower and standard rate brackets, News18 reported. He said 25% of the tax base would fall in the highest rate bracket. Fast-moving consumer goods and consumer durable products would attract 26% GST rate, against the current 31%, he said.

The Bill got Pranab Mukherjee’s approval on September 8, after being ratified by 16 states. It was passed by the Rajya Sabha on August 3.