The long-awaited reform of India's indirect taxes system is set to get a major fillip, with a broad consensus forming within the finance ministry on a rate of 16% for the proposed Goods and Services Tax (GST) for both Centre and states combined. To be levied on all companies and traders with an annual turnover of Rs 10 lakh and above, this would provide a tax base of 40-45 lakh assessees and ensure that neither the Centre nor the states suffer any revenue loss.
Sources said the rates for both the Centre and the states on GST could be 8% each, or the states could get a percentage point more depending on the final negotiations with the empowered committee of state finance ministers after presentation of the Union Budget. However, there is no scope for taking the Central threshold limit of annual turnover to Rs 1.5 crore as demanded by the states.
The introduction of GST will streamline the movement of goods across India with a single tax structure replacing the current multiple tax system, which includes central excise, state VAT and service tax -- the sum of which runs to as high as 30%
For instance, if a soap is manufactured for Rs 100, 8% excise duty is imposed on its cost, 12.5% VAT is levied on the net sum when it is cleared from the factory and 2% central sale tax is added when the goods are supplied inter-state. Again depending on the state, entry and purchase taxes are charged on the cost of the good -- taking the total price of the soap manufactured at Rs 100 to somewhere between Rs 130 and 150, said Anita Rastogi of PricewaterhouseCoopers.
In a GST system, a uniform rate will be imposed on the product only once, at the point of its supply. This should result in reduction of cost for consumers.
The law ministry is believed to have sent a detailed response on the suggestions sought by the department of revenue toward finalisation of draft Constitutional amendment of the indirect tax reforms.
The proposed GST was initially scheduled to be implemented from April 1, 2010. However, lack of consensus between states and the Centre on a uniform tax structure and their inability to carry out necessary legislative amendments led to its postponement by another six months.
"On a different threshold, the revenue-neutral rate for central GST will go abnormally high," sources said. The Centre is hopeful of taking on board Haryana and Punjab on including the purchase tax in the GST. At present both the states earn nearly Rs 1,000 crore each on account of purchase tax and have been seeking exclusion of the tax from the proposed GST model.
Sumit Dutt Majumder, member Central Board of Excise and Customs, who has an overview of the tax base on Central excise, said central excise and state VAT would still have to be levied on 'sin goods' like tobacco and alcohol, which are taxed much higher than other products.
While tobacco is taxed by the Centre, alcohol comes under states. In the current negotiations, states have sought petroleum products and alcohol to remain outside the GST model. However, the Centre wants to bring them within the GST model in order to remove the cascading effect on the proposed tax paid on inputs such as raw material and packaging material. Sales tax/VAT and state excise duty can be charged over and above GST.
The Centre also has plans to continue with some of the exemptions toward working out an ideal and faultless GST. Currently there are 330 exemptions in the CENVAT and 99 extended by states in their VAT list. After a careful screening, the Centre and states could work out a uniform exemption list that could be pruned down to 50, sources said.
In the discussions so far, both the states and the Centre have agreed to a dual GST model -- one levied by the Centre referred to as Central GST, and the other levied by the states referred to as state GST. In addition, the Centre has suggested that GST on inter-state transactions and imports should be levied and collected by the Centre which would pass on the GST on imports to concerned states on the destination principle.
On the issue of keeping the purchase tax outside the GST model, the Centre says it will give the loophole to the states to impose purchase tax on any commodity (food-grains, agricultural/forest produce, minerals, industrial inputs etc.) over and above GST. Hence, purchase tax must be subsumed. The compensation package, if agreed, need not have any link to any particular tax being subsumed, it has already clarified in response to the states discussion paper.