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States clear one more GST hurdle
January, 10th 2012

The country moved a step closer to the implementation of a goods and services tax (GST) after the state governments, key stakeholders, gave their in-principle approval to streamlining the taxation of services nationally.

Accordingly, all services, except for a few defined under a negative list, will be taxed from the next fiscal. If the Union government signs on to the proposal, then it is likely to be included in the Union budget for 2012-13. Since it will bring in untapped sectors, the Centres revenue receipts will be boosted.

This decision was taken at the meeting of the empowered committee of state finance ministers.

We have in principle agreed to tax services based on a negative list. But there are some disagreements between the Centre and the states, said Sushil Modi, Bihar deputy chief minister and chairman of the empowered committee. The Constitution clearly specifies what items can be taxed by the Centre and what can be taxed by the states. All those items on which states are allowed to levy tax should be included in the negative list.

The states are demanding that construction, luxury, air-conditioned restaurants and entertainment be included in the negative list of services so that only the state governments have the right to tax these services. They also want the services definition to be restricted to economic activity.

Services, including construction, contribute nearly 63% of Indias gross domestic product, but constitute only around 25% of total indirect tax collections. With the introduction of a negative list, service tax revenues could see around a 20% boost, according to finance ministry estimates.

Though the right to levy service tax is a Union subject, after the implementation of GST, states will also be allowed to levy service tax. GST will result in a uniform indirect tax across the country.

The aim of GST is to tax all goods and services. While today you pay value-added tax or excise duty on almost all goods, it is not the case with services. So a more broadbased system for taxing services will aid in the implementation of GST. Also, it will ensure that the credit chain is not broken, said Pratik Jain, partner at consultancy firm KPMG.

A negative service tax list will enhance the tax base and also reduce litigation. While introducing this concept, it needs to be ensured that there is no overlap between service tax and taxes imposed by states, said Jain.

State governments had set up a committee of principal secretaries, secretaries and commercial taxes commissioners to look into the proposal, following which the empowered committee firmed up its view.

Also Read | The Long Trail

If the central government addresses these concerns, then it can implement the negative list-based taxation from 1 April 2012, Modi said.

With the implementation of GST being delayed from its originally proposed start date of 1 April 2010, the central government was planning to introduce the negative list from the next fiscal year to boost revenue.

GST is Indias most far-reaching tax reform and aims to integrate the country into a common market by dismantling fiscal barriers between the states.

The Centre has already released two revised concept papers on the negative list.

The state governments have also asked that the ceiling on professional tax be removed. Currently, the professional tax that can be levied by the state government is capped at Rs. 2,500 per person per annum. We want this ceiling to be removed and it should be left to each states discretion to decide on the tax to be levied, Modi said.

The state governments also discussed the issue of the delay in central sales tax (CST) compensation. Most states had cut CST to 2% from 4% as part of the gradual phase-out of the tax, with the central government compensating them for the revenue forgone. But with the roll-out of GST getting delayed, the central government is reluctant to continue compensating states.

State governments had asked for a compensation of Rs. 19,000 crore as CST compensation for 2010-11. Of the Rs. 12,000 crore provided for this in this years budget, the central government has only released Rs. 6,393 crore to 13 states, Modi said.

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