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Pranab springs three-tier GST
July, 22nd 2010

Finance Minister Pranab Mukherjee today proposed a three-tier structure for the goods and services tax 20 and 12 per cent for goods and 16 per cent for services which states said they would consider, raising hopes that the new indirect tax regime could meet the rollout deadline of April 2011.

At a meeting with state finance ministers here today, Mukherjee proposed two slabs for goods 20 per cent for general items and 12 per cent for essential commodities and 16 per cent for services, with the Centre and the states sharing the revenue equally. The states will take a call on the proposal and meet again on August 4.

All central and state taxes such as excise, VAT and service tax will be rolled into GST once the new regime comes into effect.

The finance minister assured the states that the government was ready to raise its compensation to them for switching over to the new regime from the Rs 50,000 crore proposed by the 13th Finance Commission.

Besides, states such as Punjab and Haryana will be offered special incentives for losing out on purchase tax. Punjab and Haryana jointly get around Rs 1,000 crore annually from purchase tax.

The compensation for subsuming purchase tax on foodgrain will be provided along with VAT compensation for the next four years, said Mukherjee.

Over a three-year period, the Centre expects the three slabs to converge to 16 per cent, with the share of the Centre and states being 8 per cent each.

The state finance ministers will now discuss the rate structure and meet Mukherjee next month for a final discussion.

We are meeting on August 4 to discuss the proposed rate structures and will give a final response to the finance minister then, said Asim Dasgupta, chairman of the empowered committee of state finance ministers.

The Centre has also handed to the states a draft of the bill on GST, which it proposes to introduce in the monsoon session of Parliament.

The state finance ministers will vet the provisions in the draft bill and give their feedback to the Centre at the next meeting.

The government hopes to introduce a legislation to usher in GST during the Parliament session that begins on Monday.

The finalisation of the GST structure got delayed because of differences between the Centre and the states on various issues, including states compensation for the losses from switching to GST.

The finance ministry, keen on meeting the April 2011 deadline for the GST rollout, has also agreed to demands to keep alcohol, petroleum products and electricity out of GST.

Mukherjee said the 99 items exempted under the present tax regime would continue to enjoy the exemptions.

All exemptions will be reviewed so that the list of goods exempt from central GST is aligned to the state list.

At present, VAT (value added tax) on most items in different states ranges between 12.5 per cent and 18 per cent, while both the central excise and service taxes are at 10 per cent.

Considering the current VAT and excise rates, it seems that the overall tax on goods could come down from 28 per cent to 20 per cent, while service tax could increase from 10 per cent to 16 per cent. However, the final computation of taxes depends on a variety of factors and it is difficult to be definitive at this juncture, Harishanker Subramaniam, partner of E&Y, told Media.

Mukherjee proposed the constitution of an empowered group headed by Nandan Nilekani, chairman of the Unique Identification Authority of India, with representations from the Centre and the states, to choose the appropriate technology for GST.

Elaborating on the plans to reach a uniform tax rate in phases, Mukherjee said in the second year of implementation the tax for the general category of goods might be reduced to 18 per cent from 20 per cent.

In the third year, the standard rate on goods could be further reduced to 8 per cent for the Centre and the states (16 per cent), while raising the concessional rate on essential items to 8 per cent (each for the Centre and states) from 6 per cent each, and retaining the rate on services at 8 per cent (each for the Centre and states). Thus, in a phased manner, we will be able to achieve a single central GST and state GST rate for both goods and services, said Mukherjee.

GST is an ambitious bid to reform the indirect tax regime. It aims to streamline the movement of goods across India with a uniform countrywide tax structure.

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