The Reserve Bank of India (RBI) has suggested a two-tier structure for the Goods and Services Tax (GST) which is slated to come into effect from 1 April, 2010.
“From the administrative angle, there are supports for a two-tier structure of GST involving central and state governments... use of both the centre and state machineries in the implementation of GST would be ideal,” the RBI said in its annual report on state finances for 2007-08.
Based on the success of VAT, the government has decided to introduce GST for all goods and services.
“Centralization of sales taxation is not essential.... and central and state taxes can exist side by side,” said the apex bank.
The RBI suggested that a system of concurrent taxation consisting of a state GST (SGST) and a central GST (CGST) would be a viable medium-term option.
GST is a multi-stage consumption tax imposed on a broad range of goods and services. It is a tax on transactions and end-customers who consume the goods or services bear the final cost of the tax.
However, the report also pointed out that the component of tax rates of central and the state GST is still to be determined.
Reasoning out its claim that there is administrative support for the two-tier system, RBI said, “the Centre’s administrative capacity vests with the central excise department whereas the state’s have a larger capacity in the form of states’ sales tax establishment.”
The RBI report on states finances talks of various models for GST collection like collection at federal level and sub-national level but goes on to suggest dual level collection as the best suited for the country.
The GST is seen as a step towards simplification of the sales tax system and is expected to bring about an efficient and harmonised consumption tax system in the country.
The idea for the GST system was floated by finance minister P. Chidambaram in 2005 when the value added tax (VAT) was introduced.