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States backtrack, say no to single GST
September, 16th 2010

The overhaul of countrys indirect taxes regime faces more hurdles with many states opposing the Centres road map that envisages a single rate of goods and services tax, or GST, in three years of its rollout.

I am opposed to it...It is unethical to tax luxury cars and sugar at the same rate, Kerala finance minister Thomas Issac told Media arguing against the proposed convergence towards a single rate and suggesting the GST should provide for a dual rate structure for taxing goods.

These fresh differences could set back further this already delayed comprehensive single tax that will replace a plethora of indirect taxes levied by the centre and the states. BJP- ruled states also have similar reservations. The finance minister had on July 21 proposed that the GST could begin with a dual tax rate for goods 20% and 12%, split evenly between the respective state and centre dropping to 18% and 12% in second year.

But in the third year there was to be one single GST rate of 16% (8% by state and 8% by centre) in the third year.
For services a steady 16% (8% by state and 8% by centre) was suggested from the beginning.

Some states have objected to the roadmap suggested by the centre as they feel that single levy may impact tax collections , confirmed a finance ministry official. The issue is expected to figure at the forthcoming meeting of the empowered panel of state finance ministers on September 20.

The panel, that was tasked to work out a framework for GST, had suggested a dual-rate structure a 10% rate for essential items and 20% for others.

The Centres decision to back the dual-rate structure in the initial stage of roll out was a major concession in the interest of speeding up the finalisation of the GST structure.

But it seems states are not satisfied despite the assurance from the centre that it would compensate the states for any revenue loss from the shift to GST.

Tax experts say a more realistic approach now would be to work with the dual rate structure in which select goods are taxed at higher rates.

Ideologically opposed states such as Kerala would then have the freedom to tax products that it considers luxuries at higher rates.

However, such a dual rate structure can lead to disputes over classification of goods, or whether they will attract the higher of lower tax, complicate the GST and also push up the rate of taxation.

It will also fragment the tax along state boundaries, defeating a key objective of the new levy, to obtain a seamless market for movement of goods and delivery of services. It is, therefore, no surprise that the industry lobby bodies have backed a single rate GST.

While it is desirable to converge to a single rate of GST in a timebound manner, at this stage it may appear
unrealistic, said Pratik Jain, executive director, KPMG.

It may be very difficult for states to justify a tax rate of 16% for a common use items such as salt even with a listed of exemptions, he added.

Canada, which also has a federal system, has also opted for dual-rate GST.

Finance minister Pranab Mukherjee had hoped to introduce in the recently concluded monsoon session of parliament a constitutional bill necessary to facilitate the roll out the GST from next fiscal.

His plans were dealt a severe blow after several state governments raised objections, saying parts of the planned legislation hurt their autonomy.

But, the centre, that has already bend backwards to take states on board, would prefer to have some commitment from them on the roadmap as single rate tax is preferred for its neatness and simplicity.

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