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Former FM: Single rate for excise & service tax could harbinger GST
February, 21st 2011

The Goods and Service Tax (GST) should be devised in such a way that there is a uniform rate for goods and services, former finance minister Yashwant Sinha said. Rather than cavil about lack of support from the state governments to the proposed indirect tax reform, the Centre should set an example by bringing about convergence of the excise and service tax rates, he said.

In an interview with FE, Sinha said it was "entirely wrong for the Centre to say that opposition to GST comes from only BJP-ruled states".

States such as Uttar Pradesh have also expressed fears over erosion of their fiscal autonomy in the GST regime, he said. "Each state is looking at its own interest," Sinha said, adding that lack of consensus on GST was not for political reasons.

As per the GST draft released by the Centre, there would be two rates of excise (10x2 and 6x2) in the first year of the new regime. These rates would converge with the service tax rate (8x2) in the third year. Currently, the service tax rate at 10% is the same as the excise duty on most goods, but there are excise rates of 4% for certain merit goods and over 20% (for big cars), in addition to specific duty component for petroleum goods. Sinha said his introduction of the Cenvat system in the Budget 2000 with the input tax credit helped muster the states support for the state VAT. In 2004, services tax was integrated into the Cenvat chain.

As the government prepares to present the Budget amidst what looks like insurmountable problems ranging from inflation to dipping FDI inflows, Sinha has chalked out a list of eight priority areas for North Block which require immediate attention.

Classifying these under two broad categories of 'deficits' and 'excesses', Sinha said if he were the finance minister, tackling them would have received top priority.

Among the deficits, Sinha identified four areas: fiscal, current account, economic reforms and governance. "Apart from the deficits, there are four 'excesses' that needs to be curbed as well," Sinha said. The four excesses include, inflation & interest rates, wasteful expenditure, corruption and populism.

Voicing little optimism on the possibility of finance minister Pranab Mukherjee bringing about critical reforms in the Budget on February 28, Sinha said since the country was subsumed by problems, budget 2011-12 could be a populist one.

"Governments are forced to come out with a populist Budget when they are about to face elections or are under seige. It looks like we are going to have a populist Budget," he said. Another big concern area, according to Sinha, is the high PLR. "Up to 2003-04 the PLR was around 6%. But today its around 13%. Some body is paying the additional 7%," he said. However he said that the falling FDI should not be the sole concern of the government.

"FDI plays a limited role in the growth of the Indian economy. The key to growth is domestic savings rate and demand. FDI is like an icing on the cake. We have to worry about why FDI has declined and must do our best to attract more FDI," he said. Over the last one-year UPA 2 has come under immense pressure from all fronts.

While on one hand the opposition parties led by BJP have been demanding a joint parliamentary committee probe into the 2G scam, the country is beset with problems of high inflation, expanding current account deficit and dipping FDI inflows.

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