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Decoding the goods and services tax
July, 29th 2010

The goods and services tax (GST) is an attempt to consolidate, simplify and widen the indirect tax structure, which currently consists of excise duty, value added tax (VAT), service tax and the like.

Finance ministers (FM) recent consultations with the empowered committee of state finance ministers are indeed laudable wherein the Centre appears to have conceded to the demands of states on several issues such as multiple rate structure, compensation for loss of revenue etc. Furthermore, the governments stated resolve to give IT infrastructure a push and consider rationalisation of exemptions has fuelled hopes of a more robust framework.

Rate Structure

It is quite likely that the GST would be a 2-tier structure, with both the Centre and states keeping their taxing rights. Therefore, the GST model will essentially feature the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST).

In order to achieve a single rate of GST, the FM has suggested that rates for goods and services under GST be rationalised over 3 years. For services, a CGST rate of 8% is proposed right from the beginning. As for goods, it is proposed that there should be two categories and accordingly, these should be fixed either at lower or standard rates.

The goods falling under the lower rate would be taxed at 6%, 6% and 8% over the first, second and third year, respectively, while the goods falling under the standard rate would be taxed at 10%, 9% and 8% over the same period. The FM has suggested to the states to replicate the above structure for SGST as well.

Taxability of Goods

This rate structure for goods looks positive in light of the current tax scene as well as international benchmarks. GST (CGST + SGST) is likely to be 12% (lower rate) to 20% (standard rate). Broadly speaking, currently the effective tax incidence on most consumer products is more than 20% with excise duty of 10.3% and VAT of 12.5% or more. It is also expected that savings made by businesses on their purchases would also be passed on/shared with consumers.

Taxability of Services

If states agree to the levy of SGST of 8%, then services would be subject to GST (CGST + SGST) of 16%. This would mean that for end consumers of services like telephone, insurance and the like, cost of services could go up, as the current service tax rate is only 10%. However, the incremental impact should be less than 6% points as service providers may pass on some of the savings on their procurements to end consumers.

Small businesses

The threshold for both goods and services is proposed to be `10 lakh, as opposed to the demand of the states to keep it high for CGST. Though initially it may disappoint small dealers, especially the SSI units currently availing of excise exemption, it is an important move towards widening the GST net. The government should simplify the compliances for such businesses for wider acceptability and larger participation.

Exempt products and services

Currently, over 300 products are exempt from excise duty. It is proposed to prune the list to 99 items, as are currently exempted under VAT. Similarly, for services, it is to be seen whether GST would be imposed on all services with few exceptions or whether the existing scheme of levying tax on select services would continue. Therefore, products currently exempted under excise or VAT or both, and services currently not fully covered under the service tax net are likely to see some rationalisation.

Finally, GST on the move

Though there is still a lot to be done in finalising the GST structure, the move is in the right direction. In the near future, we hope to have a comprehensive legislation on indirect taxes which should help government widen the tax net, businesses to have a rational tax structure and ultimately benefit the end consumer.

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