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India's proposed goods and services tax
January, 07th 2010

India plans a nationwide goods and services tax, which would streamline its complex and overlapping revenue system, but has delayed the targeted April 1 launch as it looks to iron-out differences with the states.

State finance ministers are scheduled to meet in mid-January to discuss details and timing.

How does it work?
he proposed GST is an indirect tax that would replace existing state and federal levies such as excise duty, service tax, and value-added tax (VAT).

GST would be administered on a dual basis at the state and federal level and would apply to almost all goods and services produced in India or imported. Exports would not be subject to GST.

Producers would receive credits for tax paid earlier, which would eliminate multiple taxation on the same good or service.

Direct taxes, such as income tax, corporate tax and capital gains tax would not be affected.

What's the rationale for the GST?
Eliminating a multiplicity of existing indirect taxes would simplify the tax structure, broaden the tax base, and create a common market across states and federally administrated districts.

Increased compliance and fewer exemptions to GST would lift India's federal tax-to-GDP ratio from 11.8 percent.

At the same time GST would lower the average tax burden for companies that now pay "cascading" taxes on top of taxes through the production process.

By lowering business costs it would boost economic growth and increase exports, proponents argue, and bring India in line with practices in many developed economies.

Reducing production costs would make exporters more competitive.

"The GST may usher in the possibility of a collective gain for industry, trade, agriculture and common consumers as well as for the central Government and the state Governments," a November report by a government panel said. "The GST may, indeed, lead to the possibility of collectively positive-sum game."

What are the GST rates?
The actual rates are undecided. India's 13th Finance Commission, a government panel that recommends sharing of taxes between the states and the federal government, recently backed a combined rate of 12 percent -- 5 percent for the central government and 7 percent for the states.

By comparison, the current rate of the various indirect taxes levied in India amounts to roughly 20 percent, and can be much higher.

Are there exemptions?
Goods deemed necessary or of basic importance would be taxed at a lower rate, while precious metals would be taxed at a separate rate.

Petroleum products such as crude oil, motor spirit and diesel would be exempted from the GST but would still be subject to sales tax and other duties now levied.

Alcoholic beverages would receive similar treatment.

When will the GST be introduced?
Unclear. Finance Minister Pranab Mukherjee said recently that the government would not meet its target of starting it with the fiscal year on April 1, 2010, as the government works towards resolving disagreements with states.

Media reports have suggested that the GST could be implemented on Oct. 1, although some observers have questioned the wisdom of rolling out the tax halfway through the fiscal year.

Will the states lose out?
In order to compensate states for potential lost revenue, a government panel has proposed to create a 500 billion rupee (USD10.8 billion) fund as incentive for states to buy into GST, according to a report in Tuesday's Mint newspaper.

What happens next?
The legislation to make constitutional amendments needs to be finalised and the mechanism for administering the tax needs to be created. The government also needs to set up the technology infrastructure to manage the tax.

What is the revenue impact?
The GST is initially intended to be revenue-neutral but is eventually expected to increase the tax take thanks to more efficient collection and increased compliance. "It will smoothen the tax process, reduce transaction costs and raise the tax-to-GDP ratio," said DK Joshi, economist at ratings agency Crisil in Mumbai.

What about the economic impact?
Implementation of a comprehensive GST would lift India's roughly USD1.15 trillion economy by between 0.9 percent and 1.7 percent, on top of whatever growth would otherise be achieved, according to a report by the New Delhi-based economic think tank the National Council of Applied Economic Research. Exports would rise by between 3.2 percent and 6.3 percent, while imports would increase 2.4 percent to 4.7 percent, the study found.

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