New Delhi/ Kolkata: The Union government has formally accepted the state finance ministers’ suggestion to introduce a dual goods and services tax (GST) system, marking a milestone in tax reforms aimed at achieving economic integration, lowering costs and boosting transparency.
In a critical concession, state governments have agreed to adopt a uniform rate, considered key to putting GST in place. Lack of a uniform rate would have complicated its implementation because the same commodity would have been taxed differently across states. The rate will be decided by the empowered committee of state finance ministers, a collective platform for states.
According to a senior finance ministry official, who didn’t want to be named, former finance minister P. Chidambaram formally gave the Centre’s approval for a dual GST system on 29 November, a day before it was announced that he would replace Shivraj Patil as home minister.
Five days before Chidambaram approved the dual GST system, he had told an economic editors’ conference that the Union government would respond to the dual GST proposal of the committee.
The letter stamping the Union government’s approval was signed on 29 November, the official said. The deadline to move the entire country to the GST system is 1 April 2010.
GST is seen as a comprehensive attempt to solve problems that fragment markets in India and increase transaction costs. The dual GST model would subsume central excise duty, service tax and value added tax (VAT), and come with two tax rates: one that will be charged uniformly across the states and the other by the Union government.
“It is certainly a significant milestone as there’s a consensus that this is the way to go,” said S. Madhavan, executive director at tax consultancy PricewaterhouseCoopers.
The committee of the state finance ministers, headed by Asim Dasgupta, who is also the finance minister of West Bengal, has favoured a two-tier or dual structure, where the taxes imposed by the Centre and the state would be demarcated.
“The GST, duly coordinated, will be an improvement on VAT because taxes at both Central and state levels would be subsumed,” Dasgupta, who is the chairman of the committee, told Mint. “We want to tie up loose ends and give finishing touches within this fiscal year. After this is complete, we will go for wide-ranging discussions.”
Currently, indirect taxes on goods and services in India are a patchwork of rates administered separately by Union and state governments. According to Madhavan, the average of aggregate indirect taxes on goods today is 24%.
For consumers, the patchwork design makes the actual tax incidence opaque. For manufacturers, the complicated division of powers between the Centre and states sometimes results in them being taxed twice during the production process, raising the eventual price paid by consumers. Also, the varying tax incidence across states makes uniform pricing of goods difficult.
Though details on GST’s implementation have not been worked out, finance ministry officials had earlier said the idea was to make sure the consumer would be given a receipt on purchase that would clearly indicate the total incidence of tax and the way it would be shared between the Centre and states.
Implementing GST is also expected to remove anomalies such as double taxation in the production process. Once this anomaly is removed, it would immediately shave half-a-percentage point off the total incidence of indirect taxes on goods, said Madhavan.
A key milestone on the road to GST would be the consensus on fixing the aggregate tax rate, that of both the Centre and states. Madhavan said the rate could be around 20%, which would lower the incidence of indirect tax on the consumer by another 4 percentage points.