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The GST is coming
December, 07th 2006

Critics or cynics may scoff at the title and rephrase it to ask Is the GST coming? I believe, however, that the GST is an idea whose time has come. But in what form will it come about? The finance minister, in his Budget speech in March 2006 stated the country should move towards a national-level Goods and Services Tax (GST) that should be shared between the Centre and the states. He proposed April 1, 2010, as the date for introducing GST and stated that world over, goods and services attract the same rate of tax.

Several elements of this statement are of interest. The idea of a harmonised VAT/GST across goods and services has been reiterated by the minister of state for finance in his statement to Parliament this week. This reiteration would surely mean that at least at the federal level the taxes that operate, i.e. CENVAT and the service tax, will be harmonised. Given that the CENVAT rate is currently at 16% and the Service Tax rate is at 12%, the harmonisation could be done in three ways: Reduce CENVAT rate to the Service Tax ratemodify both the present CENVAT and Service Tax rates to a single third rateincrease the Service Tax rate to CENVAT rate

From all accounts, the third option is most likely. This suggests that the Service Tax rate will trend up from the present 12% to the 16%, possibly in a two step manner by March 2008. If this is achieved, the duality of goods and service taxation at the federal level would have been removed and a single unified GST at the federal level, with full fungibility of input tax credits, would be in place.

But this is just one piece in the GST jigsaw puzzle. What about the a national-level goods and Services Tax that has been mooted by the finance minister? This brings us straight to the single most critical issue that needs to be addressed and that is whether we will have a single goods and service tax, not only straddling goods and services to be sure, but more importantly, straddling the Centre and the states.

The question therefore is whether we are contemplating a unified national-level GST or whether we are limiting the GST to the federal level? Is India going to pursue unity or duality, in its quest for the perfect GST? There are viewpoints which support the dual GST, one at the federal level and other at the State level, similar to the dual VAT that is prevalent in Canada or Brazil.
 
Equally however, there is a strong viewpoint which favours the single GST for the entire country. Global experience is overwhelming in favour of the unified GST for the country as a whole. If this is indeed our intent, as is apparent from a reading of the finance ministers speech, there is no consensus on how this is to come about. Parallel to the above central initiatives, the Empowered Committee of the state finance ministers has discussed and debated a range of options with regard to GST at the state-level.

Indeed, as compensation for CST elimination, which is a key reform initiative surrounding goods taxes in the states, there is a serious proposal to enable states to tax services, in addition to the Service Tax levied centrally but on a mutually exclusive basis. Another means of compensating the states for the CST phase out that is being presently discussed in the Empowered Committee is a modification of the present VAT rates.

The point is that significant parallel initiatives are being considered by the Empowered Committee in order to achieve the objective of a harmonised GST at the State level. However, if the objective of a national-level unified GST by April 2010 is to be achieved, the further integration of GST across both the Centre and the States will need to be addressed. There is currently no agreed road map for this unified and integrated national GST. A national debate on this national GST is hence imperative. An agreed road map must be in place without delay if we are to keep our tryst with the GST by 2010.

S MADHAVAN
(The author is leader, Indirect Tax Practice PricewaterhouseCoopers)

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