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Unified excise duty, service tax to fast-track GST rollout
February, 20th 2010

Just a week before the general Budget, Prime Minister Economic Advisory Council (PMEAC) has made a case for raising duties as part of stimulus rollback, and said excise duty and service tax could be unified for a faster introduction of goods and services tax (GST) at the central level.

Partially, we need to roll back (stimulus) and if you partially roll back, there is one possibility that you unify both the rates (excise and service tax) at 10% or 12%, PMEAC member Govinda Rao said after the release of Review of the Economy 2009-10 report by the councils chairman C Rangarajan on Friday. Expressing concerns over the rising fiscal deficit, which is estimated at 6.8% this fiscal, the panel said it was crucial to cut down on spending to bring in fiscal discipline.

There is a case for adjustment of duties. Adjustments are possible both on the revenue and expenditure front in order to bring down fiscal deficit, PMEAC chairman C Rangarajan said.

The panel suggested unifying the threshold and rate structure of cenvat and service tax to introduce GST at the Centre. The unification may be done at a level in between the current rate and the previously existing general rate for excise duty, it said.

Doling out stimulus to the industry in two installments since December 2008, the government reduced the excise duty from 14% to 8% and service tax from 12% to 10%.

Suggesting expansion of service tax base, the council said if the government brings previously exempted items like railway fares and freights under the service tax net, it could add to the revenue by about 0.5% of gross domestic product. Rangarajan said the government could reduce the fiscal deficit during 2011-12 by 1% by rationalising expenditure and another half a percent from the revenue side.

Expanding the service tax base would also help in assessing the base of State GST and help to finalise the revenue neutral rate of State GST as well as the mechanism for compensating states for the loss of revenue, PMEAC advised. This will also provide a measure of comfort to the states in making a smooth transition to the GST regime, it added.

The panel said the government needs to do a considerable preparatory work before GST is launched, and suggested that the April 2010 deadline is not realistic. An important initiative for bringing in GST regime is putting in place a centralised agency to track inter-state transactions and function as a clearing house, the council added. This will also help in the computerised information system for Central GST. This will ensure better tax compliance, prevent misuse of tax credit mechanism for input taxes and will enable a smoother mechanism for relieving the tax on exports, it added.

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