India has moved a step closer to uniform taxation of products and services across the country with a government committee presenting a report on how this could be done.
If the report is accepted, India will move to a single so-called goods and service tax (GST), effectively doing away with the existing multiple rates of taxation. In the process, the government could make the taxation regime transparent and widen the tax base. To customers, GST could even mean lower prices.
The move to GST indicates a shift from a point of origin tax regime to a point of sale one.
The committee has suggested that GST, when it rolls out on 1 April 2010, have two components—a Central tax and a single uniform state tax across the country.
The dual structure, as well as another recommendation by the committee that a tax over and above GST could be levied by the states on tobacco, petroleum and liquor, will likely help the report find favour with the states.
These three product categories account for a significant proportion of taxes collected by the states.
The report containing the recommendations of the committee, comprising bureaucrats from the Centre and the states, was submitted on Wednesday to an empowered group of state finance ministers on VAT, or value-added tax. GST will replace VAT.
The chairman of the empowered group, Asim Dasgupta, also the West Bengal finance minister, told reporters that they were agreeable to the idea of a dual structure.
The essence of the recommendations is separate GST rates for the Centre and the states, said a senior government official, who was a part of the empowered committee and did not wish to be identified.
Separate GST rates, to be finalized at a later stage, would also be fixed for products and services, the official added.
If adopted and implemented, GST will neutralize the existing problem of taxes being levied on top of taxes.
For instance, when a shoe company produces a pair of shoes, the Centre charges an excise duty on them as they leave the factory.
At the retail level, the state where the outlet is located, charges VAT (different states charge different rates of VAT) without giving credit on the excise duty levied earlier (the state tax is levied on top of a Central tax).
In the GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost. The result: lower incidence of tax and, possibly, reduced prices.
Tax consultants welcomed the move to GST. “This (GST proposals) would be a huge improvement on the current situation and this is a move towards the global concept of GST,” said Anita Rastogi, principal consultant, PricewaterhouseCoopers Pvt. Ltd, an audit and consulting firm.
The empowered group of ministers will send the committee’s recommendations to the Centre next month after the state finance ministers give their views in writing, Dasgupta said.
Thereafter, the Centre and states would together finalize the legislative changes that will be required to adopt GST.
Currently, around 120 countries have moved to GST.
Because the GST system is transparent and simple, the government could use it to remove tax exemptions for select merchandise and nudge the system towards a lower tax rate, the government official added.
The empowered committee has also suggested that states stop using tax concessions as a bait to attract investments in manufacturing.
Instead, concessions to select industries on grounds such as environmental protection could be provided in a transparent manner through cash refunds on taxes paid, the official added.
PTI contributed to the story.