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Proposed GST is too fractured for now
August, 02nd 2010

The revised scheme for Goods and Services Tax (GST) which has now been announced by the Finance Minister on 21st July in the presence of the Empowered Committee of State Finance Ministers lays too much emphasis on what will be achieved in future.

But in the present form it is fractured, incomplete and lacking in the strength to achieve the objective of a proper proper GST. What is now being proposed for April 2011 is a regime of separate goods tax and a service tax, a situation which is continuing now also.

It only achieves empowering the right to levy service tax to the States and empowering the Centre to levy sales tax. By itself it achieves little. On several points the proposed format of GST suffers from severe struct-ural defects which are discus-sed below.

First, the rates for two years for goods will be different from the rates for services. So it is not a goods and services tax at all as it is understood internationally. When we see the rates of goods and services all over the world, they are the same (except Myanmar and Suriname). The fact that it is proposed to make the rates same after two years shows that on principle it has been agreed to.

In that case why not do it at the beginning itself? For one thing the government had the preparation time for full year to introduce comprehensive service tax and for another the service tax rates will increase but the over all tax burden on the industry will be either 20 per cent or 12 per cent which together are not much higher than the 16 per cent now been proposed after two years .

More over the industry and the trade have been reconciled to have a comprehensive GST in the place of the present system of numerous taxes. Once the tax is made out transparently to be revenue neutral, no separate objection for hiking service tax could be raised.

The best argument which will sell now is that the peak effective rate will be about 15 per cent, (and as the FM has observed himself), it is acceptable to the industry.

As is known, the present combined incidence of excise, service tax and VAT is more than 20 per cent. On the other hand when the service tax rate will be increased after two years from 16 per cent to 20 per cent, there will be more objection because 2013-14 will be the year just before the general election due in May 2014 when the desire to please all will prevail over any thought for rationalisa-tion of tax. So the best time to combine goods and servi-ces tax into one entity is right at the start.

Second, the proposed GST does not encompass so many goods namely petrol, diesel, alcohol, electricity some forms of octroi. Third, the proposal does not mention anything about a very crucial aspect, that is, the mechanism for inter State transfer of input credit of GST which is known as IGST. We find that UIDAI Chairman, Nandan Nilekani said that IT infrastructure for GST will be ready in the next six months, that is, by February 2011. But there is no indication as to what the basic structure is which will be given effect to by the GSTN. First it has to be deci-ded what the structure of the GST and particularly the IGST will be.

Fourth, regarding veto power of the Centre there is so far no agreement between the States and the Centre. There is some indication that the States have not agreed to an absolute veto power by the Centre. The FM has appealed to the Industry leaders to help building a consensus to support it.

The conclusion is that GST should be introduced with both goods and service taxes rolled into one. The selective service taxes must be replaced by a comprehensive service tax. The procedure for inter State credit of input tax must be finalised. The issue regarding veto power of the Centre and how to change rates in future must also be settled. To seek opinion of industry, trade and public in general a Second Discussion Paper should be issued at the earliest.

 
 
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