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Dump multiplicity of tax rates
March, 02nd 2010

Finance minister Pranab Mukherjee believes that indirect tax proposals in this Budget would pave the way for a smooth transition to the goods and services tax (GST) regime. Agreed, the tax rate for goods and services has converged at 10%, which is one pre-requisite for GST.

The other is to have a clutter-free tax system. But the Budget has faltered here. It has introduced multiple import duty rates, lower excise rates and service tax exemptions to specific sectors in an arbitrary manner. The government should shun a cluttered tax system and withdraw exemptions if it is serious about implementing GST from April next year.

The model GST, recommended by the Thirteenth Finance Commission (TFC) and accepted by the Centre in principle, allows for no exemptions other than a small common list that includes health and education. The government should implement TFC recommendations in this regard. It must expand the service tax net to cover all services including Railway passenger fares.

Area-based exemptions must also end as it would be difficult to subsume such schemes under GST. Multiple indirect tax rates favour some goods at the expense of others, leading to inefficient allocation of resources and dent the governments revenue. The revenue forgone on area-based excise exemptions alone is estimated at Rs 1,70,765 crore this fiscal year, significantly higher than the Centres excise duty collection of Rs 1,02,000 crore.

Successive governments have struggled to reform indirect taxes, to bring about low and uniform rates. From over 100 excise duty rates in the 1980s, reform-minded finance ministers compressed the rates to three by the late 1990s. The introduction of the modified value added tax for select commodities at the central level in 1986 began the process.

It was extended to all commodities through the central value added tax (Cenvat). But distortions crept in due to pressure from industrial lobbies. The point is to move to a low, single, uniform rate, not create room for lobbying, patronage and, worse, by creating multiple rates.

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