New Delhi: Finance minister Pranab Mukherjee signalled on Wednesday that the Union government will nudge states towards a goods and services tax (GST) architecture that would have few exemptions and tend towards a low rate.
Mukherjee, who was opening the debate on the Finance Bill in the Lok Sabha, also said the government hoped to introduce draft legislation in the monsoon session of Parliament for a new direct tax code (DTC). The monsoon session is usually held in July and August.
The finance minister had said in his Budget speech in February that he hoped to introduce a new DTC and GST by 1 April 2011. The DTC is under the exclusive domain of the Union government, while the country can shift to a GST only after the states and the Centre agree on an architecture.
Mukherjee’s speech identified areas important to the Centre in the forthcomingnegotiations with the states: The threshold to levy GST, a uniform list of items exempt from tax and the level of tax rates.
The Centre aims to incentivize states to accept its framework for the GST architecture by linking it to compensation to states that experience a fall in revenue after the transition.
“The Central government is willing to provide compensation to the states for these initial years, provided there is agreement on the broad framework for a common threshold for goods and services between the Centre and states, common exemption lists between the Centre and states, mechanism to check deviations and acceptable level of overall GST rates,” Mukherjee said.
The transition from the indirect tax system to GST is an attempt to create a common market, which would bring down operating costs for businesses and lower prices for customers.
According to Satya Poddar, partner at Ernst and Young, Mukherjee’s speech was an attempt to start negotiations with states by trying to set their fears on compensation at rest.
“The key issue is lack of trust in compensation,” Poddar said. “He’s probably trying to reach out to states.”
The states, in a white paper on GST, had said in November they wanted three tax slabs for goods and planned to exclude important areas such as electricity and real estate from GST. Typically, the smaller the tax base, the higher the rates.
In a response to the states’ proposal, the Union government wanted a single rate, few exemptions and a common threshold of tax for centre and states.
Separately, the draft DTC had been placed in the public domain for debate in August. This aims to simplify the direct tax structure and bring it in sync with the current economic environment.
Some stakeholders, during open house meetings, had identified as being too harsh the draft’s proposal to levy minimum alternate tax on gross assets, allow domestic law to override international treaties and tax maturity proceeds of long-term savings products such as insurance policies.
The finance ministry’s “approach has been pragmatic” in engaging stakeholders on all these issues, said Dinesh Kanabar, deputy chief executive and chairman, tax, KPMG.
Mukherjee said a reworked draft DTC would be placed in the public domain in May before a draft legislation is finalized.