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Centre needs to walk the talk on indirect tax reform
January, 22nd 2016

The Centre needs to walk the talk on indirect tax reform. The fact of the matter is that the Centre, glaringly, prefers not to provide input tax credit and set-offs for entire segments like capital goods and whole sectors like petroleum products, never mind that we have long had a dual value-added tax (VAT) system at the Centre and the states, with tax only payable on the value added. As the recent Arvind Subramanian committee report points out, no input tax credits are allowed for the Union excise duties on capital equipment acquired for use in such key industries as transportation, infrastructure, distribution or construction. The purported reason is that they are outside the scope of manufacturing. As if manufacturing takes place in self-contained cocoons.

Meanwhile, the Centre has — rightly — again raised the excise duty on the main petro-products like diesel and petrol, given the drop in international oil prices. The latest hike is the second in less than two weeks. But in tandem, the government surely needs to extend VAT for automotive fuel. True, petro-products provide hugely disproportionate tax revenue for the government. But it simply amounts to tax-on-tax and inefficient cascading rates, and we really ought to modernise consumption taxes and widen the tax base. Abroad, in Europe, for instance, high taxes on oil coexist with VAT on such items.

We need a similar system here, so as to modernise logistics, transport and distribution. The Subramanian panel estimates blocked input taxes on capital goods adding up to as much as 75% of total investment of Rs 7.4 lakh crore in plant and machinery in 2014-15. The government must create a functional VAT of central taxes, regardless of when the goods and services tax (GST) kicks in.

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