India’s attempt to create a common market with a unified tax structure tentatively moved ahead Tuesday when the states defined an architecture for the proposed goods and services tax (GST), but the draft they released was notable more for what it left out than what it included.
It was silent on the actual tax rates, the deadline (previously set at 1 April 2010 and which definitely looks unrealistic now), and the treatment of sectors such as real estate and electricity.
The finance ministers of some states said there were tough negotiations going on between the states and also between the states and the Union government and saw the draft discussion paper released as more a way of including more people in the debate than a solution.
The country’s finance minister said as much.
“Detailed discussions with all stakeholders which will begin with the release of the documents today will help us refine the design and concepts further,” finance minister Pranab Mukherjee said in his speech on Tuesday to the state finance ministers.
GST is an effort being jointly pursued by the Centre and the states to radically transform India’s indirect tax structure. Originally, a single GST was to replace a tangled web of national, state and local taxes, and would have been the culmination of a long process of indirect tax reforms that began in 1991.
The discussion paper cleared the air on service tax. The states proposed a single category of service tax to accompany three different categories of taxes on goods. Gujarat’s finance minister Saurabh Patel has suggested the service tax rate be the same as the tax rate for the standard rate of goods, which would be the highest rate for goods.
The discussion paper was released by the empowered committee of state finance ministers jointly with Mukherjee. The discussion paper aims to collect suggestions from other stakeholders in GST such as industry, traders and consumers.
“As we go ahead, we will take stock and let you know,” Asim Dasgupta, chairman of the empowered committee told the media in response to questions about the deadline for the rollout of GST. Former finance minister P. Chidamabaram had set April 2010 as the deadline to transition to GST.
The discussion paper needs to be followed up by negotiations with the Centre, constitutional amendments and creation of information technology infrastructure, among others, before GST can be rolled out.
As of now, the Union government has formally accepted a dual GST model, one where the Union government and states separately tax each good or service. However, the Union government is yet to publicly announce its reaction to the states’ proposal to place goods in three categories and tax them at different rates. Mukherjee’s speech to state finance ministers outlined his suggestions of the broad principles of GST such as moderate rates and uniformity among states on goods and services to be excluded from GST, but did not commit to specifics.
The move to a GST regime was expected to help firms produce more efficiently and give consumers more clarity about the taxes they paid on goods and services.
GST analysts Mint spoke to had divergent views on the states’ discussion paper, based partly on their expectations of the paper.
“It is a patchwork of political compromises which are not good economics nor will they be good politics,” Satya Poddar, partner at consultancy Ernst and Young, said, while giving an overview of the paper.
“My sense is you need to start somewhere. It is a good step,” S. Madhavan, executive director at PricewaterhouseCoopers, said, adding he was not surprised by the contents.
States have recommended that the Union government’s surcharges, cesses and special additional duty of customs (4%) should be subsumed into GST. On their part, states are willing to bring luxury tax, entertainment tax, taxes on lottery, betting and gambling and state cesses and surcharges into the GST net.
States are still debating the inclusion of purchase tax, a bone of contention between Punjab and Haryana on one side (the two states are agricultural ones that produce more grain than they need) and the other states. Octroi, which is largely raised by Maharashtra has also been kept out of GST until now.
“There are some differences among states. These (discussion paper) are steps towards convergence of views,” Dasgupta said.
The paper clearly said alcohol and petroleum products would be out of the purview of GST, while states are still debating the inclusion of natural gas into GST. “To begin with alcohol and petroleum are left out of GST,” Dasgupta said, suggesting there could be a change later. Keeping petroleum products out of GST is “a huge penalty on refineries from making investments”, Poddar said. With petroleum products outside GST, Poddar felt treating natural gas differently would defy logic.
Other than tough negotiations between states on areas such as purchase tax, two state finance ministers, who did not want to be named, said discussions were going on between the states and the Union government on the issue of Central sales tax (CST) compensation.
A CST of 2% is collected by states where factories are located when goods are transported across borders for sale elsewhere. Some states, particularly Gujarat and Tamil Nadu, are locked in hard negotiations with the Centre about CST compensation for earlier years and also for compensation to offset losses on account of transition to GST.
“Negotiations will be finished within 15 days. That is an assurance we have been given,” a state finance minister said. “What’s more important is the confidence level. What’s the assurance that with GST, compensation will be smooth?” the minister asked.
“It (CST compensation) will have to be addressed specially,” Dasgupta said.
States have proposed the Centre compensate states which lose revenue following a transition to GST for a period of five years. According to studies by the empowered committee, a GST of 18-20% is the rate at which none of the states would lose revenue. Some states feel this revenue neutral rate is too high, which accounts for the demand for compensation to transition to GST.