The Indian economy is among the fastest growing in the world, and requires a constant inflow of funds to sustain this pace. And a simple, uniform and stable indirect tax structure is necessary to retain and accelerate this fund flow. Foreign investors often complain that our indirect tax structure is multilayered and complex with over half a dozen levies.
Amrita Mitra, partner, indirect tax, Grant Thornton India
Recognizing this need, the Finance Minister introduced one of the most encouraging changes in indirect tax structure in the 2006-2007 Budget. Chidambaram declared: “It is my sense that there is a large consensus that the country should move towards a national-level Goods and Services Tax (GST) that should be shared between the Centre and the States. I propose that we set 1 April 2010, as the date for introducing GST”. One of the foremost expectations from Budget 2008-09 is that with just two years to go, the Finance Minister lays down a clear roadmap with specific deadlines to achieve this target date for introduction of a single GST to replace the existing multiple indirect taxes.
The GST is a multi-stage consumption tax imposed on goods and services. The tax is a pass through for most manufacturers and service providers and the end customer, who consumes the goods or service, bears its cost. Introduction of GST would give us the simple and uniform indirect tax structure we need.
However, while the intent is laudable, the implementation is difficult and cannot be as smooth or as fast as one would desire. The reason is our quasi-federal structure. Indirect taxes, such as excise duty, customs, and service tax are levied by the Central Government, while the state and local governments levy VAT, octroi, entry tax, entertainment tax, gaming tax. Neither of the two is happy to give up revenue and merge it into a uniform GST. Tax experts believe that the solution lies in a dual structure wherein the Centre and states divide items on which each can impose the uniform levy of GST and there is no double taxation.
The Finance Minister during his Budget Speech 2007-2008 announced that, at his request, the Empowered Committee of State Finance Ministers had agreed to work with the Central Government to prepare a roadmap for the introduction of the Goods and Services Tax (GST) with effect from 1 April 2010. The Empowered Committee of State Finance Ministers, in consultation with the Central Government, had constituted a Joint Working Group.
Based on the recommendations of this Group, the Empowered Committee of State Finance Ministers had, in November 2007, agreed on a dual GST structure and rates being finalized by December 2008. They recommended a Central GST Authority and a State GST Authority. The current Central and State levies would be subsumed in the uniform GST. These recommendations need to be agreed between all states. There is the tricky issue which needs to be resolved and this relates to compensating the states with a revenue neutral rate of tax that makes up for the taxes they are giving up.
It is now our expectation from the Finance Minister that when he rolls out Budget 2008-2009, he clears the fog over these issues and lays down a clear road map for introduction of this revolutionary indirect tax regime.
Some of the steps that would be needed in this direction are:
• Reduce CST to 1% (from the current level of 3%)
• Harmonize the rates of Central Excise and Service Tax
• Eliminate end use/region based exemptions
• Set up a body to recommend the constitutional amendments, if any, that would be needed to implement a uniform GST
• Give clarity on how import duties would be merged with the GST
• Give a clear schedule of dates for each of these changes.
We now look forward to the FM cracking the GST code and giving a clear direction on implementation by 1 April 2010.
The author is partner and all-India head, indirect tax, Grant Thornton India