New Delhi: A rearguard action to stitch together a common market in India through the introduction of a single goods and services tax (GST) was initiated on Thursday when the empowered committee of state finance ministers (FMs) decided to present a draft discussion paper on the tax in public domain by end-October.
The discussion paper is expected to detail the implications of different models of GST, including the one announced by the empowered committee last month (Mint 17 September), which is similar to the existing value-added tax (VAT).
In September, the states had proposed a lower GST rate for items of mass consumption, a regular rate for other goods and a nominal charge of 1% on precious metals.
Stakeholders who prefer a simple GST without multiple rates say that once a larger audience is made aware of the costs associated with varying tariffs, it would sway opinion in favour of a single levy, according to a person familiar with the negotiations, who didn’t want to be named on account of the sensitivity of the issue.
The discussion paper is also expected to trigger dialogue between stakeholders with sharp differences on the GST model.
The flip side of the multiple-rate system proposed last month would be higher tax rates. Saurabh Patel, FM of the Bharatiya Janata Party-administered Gujarat, in a note on GST prepared for the Thursday meeting, cautioned that “a two-rate structure, as is being contemplated presently, would make RNR (revenue neutral rate) higher, which may not be acceptable.
A lower RNR in such a scenario would lead to a revenue loss of a permanent nature, which needs to be addressed.”
Patel had on 29 September in a letter addressed to Asim Dasgupta, chairman of the empowered committee and also West Bengal’s FM, asked for a concept paper on GST to be placed in the public domain to bring about a discussion.
Following Thursday’s meeting of the empowered committee—a body of FMs of India’s 35 states and Union territories entrusted with the task of coming up with a blueprint of GST— Dasgupta said a draft discussion paper on GST, a draft of the constitutional amendments and related matters would all be readied within a month.
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 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.
The empowered committee’s decision in September is similar to VAT that states currently impose, though GST was envisaged as an improvement over the current system.
“Unless governments can agree on a clean model, (the) draft may be a good way of getting inputs from the public and the business community,” said Satya Poddar, partner at audit and consultancy firm Ernst and Young.
A fallout of Thursday’s developments is a decline in the probability that India will move to GST by 1 April 2010, as indicated by FM Pranab Mukherjee in his Union budget speech.
Some of the state FMs who attended Thursday’s meeting said a lot of work had to be done to prepare the taxation system, including creating an information technology backbone for it.
Dasgupta said the Centre would have share a big part of responsibility to upgrade the required infrastructure and bring about coordination between the states.