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FinMin allays fears that 1% tax over GST will make imported goods cheaper
August, 14th 2015

The finance ministry says one should not worry that the proposal for an extra tax up to one per cent over the goods and services tax (GST), to woo manufacturing states on board, would encourage imports. If this happened in some cases, it has said, customs duty could always be raised.

A key official in the ministry argued that the current two per cent central sales tax (CST) had not made imports cheaper. So, why should it happen with a one per cent tax on interstate sale of goods? CST is also imposed on interstate sale of goods. It would be subsumed with GST, once the latter is rolled out.

CST does not have a system of credits for taxes paid on inputs. So, too, with the additional tax proposed over GST. As such, both lead to cascading. Earlier, there was to be additional cascading, as it was to be levied on all interstate supply of goods. To avoid this, the Rajya Sabha panel, which examined the change, has suggested this one per cent be limited to interstate supplies which are for monetary considerations. The revised Bill, tabled in the Rajya Sabha, in fact, proposed to limit this tax to interstate commerce.

CST is already imposed on interstate trade of goods. “If your two per cent tax is not making imports cheaper, how can half the tax rate do so?” asked a finance ministry official.

Sources said the government does not forgo its right to alter customs duty and would raise the tax in case the situation demands it. “We will see to it that one per cent tax does not lead to an inverted duty structure. We might have a re-look at import duty in case the situation arises that imported goods become cheaper,” said the official.

Also, the one per cent tax will stay only for two years, till manufacturing states recover their revenue loss on account of GST, a destination-based tax.

Arvind Subramanian, the chief economic advisor, had argued that the one per cent and origin-based tax would have a cascade effect and favour international trade over intra-national trade. This was before the Rajya Sabha panel gave its report. A committee is currently looking at the issue of further minimising the cascade impact of the additional one per cent tax.

“It will look at suitably addressing the issue,” the official said, adding, “It is important to note that it is primarily for two years.”

Subramanian had noted a product going to Gujarat from Tamil Nadu crosses four states and the product will embody an additional tax of four to five per cent, making it easier to import to Tamil Nadu from Bangkok or elsewhere. “So in a sense, it has the potential to undermine Make in India. That’s why we need to look at this provision carefully,” he’d said.

“If the one per cent tax is applicable only on monetary transactions, it will not encourage more than what it is doing right now. In fact, in relative terms, the impact will be less than what the two CSTs had on imports,” said Satya Poddar, senior advisor, EY India.

He added his own view was that there shouldn’t even be the one per cent origin-based tax. “Even the two per cent tax encouraged many imported goods through dealers,” he added.

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