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Centre, states may agree on 16% GST
January, 22nd 2009

Structure to take a firm shape after states panel meets prime minister.

The Centre and the states may reach an agreement to have 16 per cent rate for goods and services tax (GST), which will be implemented from April 2010.

GST, which will replace almost all central and state taxes, could have two components of 8 per cent each one will go to the Centre and the other to the states, according to sources familiar with the talks between the Centre and the states.

However, it will not cover tax on petroleum products and Customs duty.

Key negotiators on behalf of the states and the Centre are keen that there is a single GST rate structure, one at the central level and the other at the state level, said a source, adding that the structure would take a firm shape after a meeting with Prime Minister Manmohan Singh.

Under GST, both the Centre and the states will have powers to tax goods and services. At present, the states cannot tax services.

A few states are also demanding freedom to have two slabs under their component of GST so that items like medicines can be taxed at lower rates. In case it is decided to have two slabs, one rate could be 10-11 per cent and the other around 5 per cent.

The empowered committee of state finance ministers will meet the prime minister, who also handles the finance portfolio, before February 12. The empowered committee, the highest body of state finance ministers, also has representatives from the central government.

GST will subsume central excise, service tax, state sales tax and central sales tax. At the moment, central excise rates are 10 per cent, 8 per cent and 4 per cent, the service tax rate is 12 per cent, state sales tax rates are 12.5 per cent and 4 per cent, while the central sales tax rate is 2 per cent.

There is a convergence of views between the empowered committee and the Union finance ministry on the dual GST model. Rates will be very few and aimed at giving relief to trade, industry, agriculture and consumers, Asim Dasgupta, West Bengals finance minister and the chairman of the empowered committee, said after a meeting on GST issues with state finance ministers here.

The revenue-neutral rates will be determined after calculating the revenue loss to states under the new system and additional income from tax on services.

The single GST rate structure will benefit both the Centre and the states. The scope of service tax will be expanded to all services. At present, a little over 100 services are taxed.

Similarly, area-based exemptions to industry will be phased out and common and minimal number of goods and services will be phased out.

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