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States propose 20% GST, want lions share
December, 17th 2008
India moved a step closer to a sales tax structure that promises to unify the countrys markets and reduce transaction costs with the finance ministers of all states on Tuesday proposing a 20% goods and service tax (GST), with a larger share of this going to the states. The empowered committee of state finance ministers, the group that signs off on tax reforms in India, also protested a Union government move to lower the tax rate on aviation turbine fuel (ATF), which is currently taxed by the states at varying rates. Analysts and experts say GST is a way to simplify Indias so-called indirect taxes. In talks that have gone on for at least a year, the Centre and the states have agreed on a dual GST model. This dual tax will include Central excise duty, service tax and value-added tax (VAT). It will have two constituents: one that will be charged uniformly across the states and the other by the Union government. According to a minister who attended the meeting of the empowered committee and who did not want to be identified, there is consensus among states that the overall GST rate should be around 20%, with states getting more than half. The final decision on the rate is yet to be made, he added. Kerala is not willing to accept less than 20% as a total GST tax rate, said Thomas Issac, finance minister of Kerala, who attended the meeting. A person familiar with preliminary negotiations on the rate said some states and the Centre were open to a 18% GST with the two taking an even share, but only if all prevailing tax exemptions are scrapped. Currently, manufacturers get a tax benefit if they start factories in some states. The 20% number will still be a decrease from the current rate. S. Madhavan, executive director at audit and consulting firm PricewaterhouseCoopers, says the average incidence of aggregate indirect tax on goods in India is around 24%. For consumers, however, the patchwork design makes the actual tax incidence opaque. And for manufacturers, the complicated division of powers between the Centre and states sometimes results in them being taxed twice during the production process, raising the eventual price paid by consumers. The varying tax incidence also makes uniform pricing of goods difficult. The ministers also discussed the possibility of the Union government amending the Central Sales Tax Act to unilaterally lower the tax rate on ATF in order to help Indias beleaguered loss-making airlines. Asim Dasgupta (the West Bengal finance minister and chairman of empowered committee of state finance ministers) will be writing soon to the centre on the Central sales tax issue, said Issac. Issac said that all states, including those ruled by the Congress, the dominant constituent of the United Progressive Alliance government, are opposed to the Centre unilaterally amending any Act that affects the revenues of states. The civil aviation ministry has been seeking relaxation from states on jet fuel, or ATF. Only Andhra Pradesh has reduced its sales tax on jet fuel to 4%, with states such as Rajasthan and Maharashtra agreeing to selective relaxation. The Centre had established a panel headed by cabinet secretary K.M. Chandrasekhar earlier this year to study the issue. This panel has suggested lowering of taxes on jet fuel to a uniform 4% from as much as 30% in some states now, as reported by Mint earlier. On Tuesday, a civil aviation ministry official, who did not want to be identified, said the issue is awaiting cabinet approval and the ministrys stand remains unchanged. It is their (states) view; it has nothing to do with our view, this official said, adding that the ministry has already sent a note for cabinet approval seeking declared goods status for ATF. The move, said audit and consulting firm Ernst and Youngs aviation analyst Kapil Arora, could help airlines return to profitability earlier because it will save them a total of Rs3,000 crore. SpiceJet Ltds director Ajay Singh echoed a similar sentiment. The Central government has been requesting states to lower the sales tax, but I have my own reservations on this issue. We have requested (them) to include ATF as declared goods which will automatically bring down the prices to desired levels, Singh said. A Jet Airways (India) Ltd spokeswoman said any reduction in the sales tax on jet fuel would be welcome, but added that her airline would prefer if ATF was accorded a declared goods status.
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