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Common rules for services, goods tax on road to GST
July, 31st 2010

The crucial issue of harmonising the service tax rules with those on taxation of goods is set to be addressed soon, marking another progress in the direction of roll out of the comprehensive goods and services tax (GST) regime.

Services began to be taxed in 1994 but clear rules to establish the principles of their taxation are being framed only now because of the need for a common set of rules under the GST, which is expected to be rolled out from next fiscal.

The draft rules will help ascertain clearly the time of delivery of a service so that there is no ambiguity over the right to tax, an official told ET. Such a clarity is needed because under the GST regime, the states will have the power to tax services, and the rules will have to spell out right to tax in the case of taxation of inter-state delivery of services.

Telecom is one obvious case where the point of delivery of service and right to tax will have to be established clearly. The government is expected to put out the rules for comments next week, the moot point being that services will become taxable on the date of invoice itself.

Under the current regime, service tax becomes payable only when payment is received for the service provided, which is at variance with the way goods are taxed. For instance, states levy sales tax (value added tax) on sale of goods when the invoice is issued. Excise duty is also paid at the factory gate when the goods leave the factory on issuance of an invoice.

This would essentially align service tax with the goods taxation which is accrual based, says Bipin Sapra, partner, Ernst & Young. The consistency in rules is expected to lessen the compliance burden and reduce costs of doing business.

Today industry has to maintain separate records for billing and collections for services tax as tax is paid on collection which essentially means reconciliation, usually done manually, says Pratik Jain, executive director, KPMG.

The GST is countrys most ambitious indirect tax reform that would replace existing state and central taxes such as excise duty, service tax, and value-added tax and purchase tax by a single levy to create a seamless pan-India market.

The new levy will also bring down the incidence of total indirect taxes on goods and services as it would provide for set off of tax paid on a wider set of inputs including services.

The GST was expected to be rolled out from the current year itself but has been pushed back by a year as the Centre has not been able to get states on board on key issues.

Many experts have also questioned the system preparedness for the levy, which includes IT systems, rules, legislative changes and dispute resolution. Some of the BJP ruled states have also said that it would be unwise to push through the tax hurriedly.

The Centre is, however, keen to ensure that the GST is rolled out from next year and has begun work on the integration of the different tax
structures and administrations.

Simple return forms, rules and IT systems are being worked out at a feverish pace by the union finance ministry. The finance ministry has roped in Unique Identification Authority chairman Nandan Nilekani to help suggest a framework for the IT regime for the new tax.

The Centre had on July 21 proposed a three-rate structure for GST, in line with the recommendation of the empowered committee of state finance ministers, under which goods will attract a levy of 20%, services 16% and essential items a concessional 12 %.

It had also circulated to states a copy of the proposed constitutional amendments required for launch of GST besides offering full compensation for any revenue loss on account of switchover to the new regime.

The empowered committee of state finance ministers will meet on August 4 to take a call on the Centres proposal.

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