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Govt to work on Service Tax structure
May, 25th 2009

The Congress-led UPA government has just 10 months to usher in a new goods and services tax (GST) regime to create a seamless common market across the country. Consumers will pay a single rate of tax on goods and services sold across India, if the government introduces the levy from April 1, 2010. Work is in progress, with the empowered committee (EC) of state finance ministers scripting a model and roadmap for GST in India.

The EC has recommended a GST with a central and state component. And the Congress manifesto refers to a moderate goods and services tax, saying once GST is implemented, all other state- and central-level indirect taxes, including VAT, excise duty, service tax, luxury tax and so on will stand abolished. Customs duty will be out of GST and is likely to be replaced by VAT on imports.

A clear structure of GST needs to be in place in the first 100 days, said TR Rustagi, former joint secretary in the finance ministry. Echoing a similar view, S Madhavan, executive director, PricewaterhouseCoopers, says the government should set a clear timeline and declare a model GST. Four years ago, states switched over to the VAT system, which has bolstered their revenues and improved compliance. Goods attract a 4% or 12.5% state VAT, while excise duty is 8% for most commodities. Services are taxed at 10%.

The enactment of GST would mean integrating the service tax legislation with the central excise law and harmonising the tax rates. While this will require legislative and constitutional changes, the move will reduce cascading of taxes and give psychological comfort to consumers. A well-designed GST will lower manufacturing costs. It will also make businesses more efficient.

An earlier panel chaired by Vijay Kelkar, chairman of the thirteenth finance commission, had mooted a GST of 20%. The plan is to have a revenue-neutral rate that will ensure states and Centre do not make any losses while transiting to GST.

Petroleum products and liquor are outside VAT and a view has to be taken on their treatment. States want petroleum products, which account for over a third of the indirect tax revenues of the Centre and states, to be kept out of GST. But the Centre reckons that a large component of petroleum taxes can be subsumed in GST.

The differences are not surprising as states want to make sure that their powers of taxation are not diluted in any manner. Issues such as the power of levy, collection and appropriation and sharing of revenues between the Centre and states under GST are yet to be sorted out. IT systems also have to be in place. The draft GST legislation will then have to be formulated in consultation with all stakeholders, including industry.

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