India may, as an interim measure, adopt a hybrid model of goods and services tax (GST), which could seek to blend elements from the current system, instead of moving directly to a single-tax regime by 2010.
The tax reforms road map envisages that the Centre and the states migrate to a single tax on both goods and services. At present, the Centre levies excise duty on goods and service tax on services, while state governments levy value-added tax (VAT) on goods and services. “In reality, we will have a hybrid model between the two,” said Parthasarathi Shome, adviser to the finance minister, while addressing a seminar on GST on Wednesday, organized by lobby group Associated Chambers of Commerce and Industry (Assocham). Shome felt three years is enough time to move to GST.
Currently, taxes are levied separately by both the Centre and states on the same product. State taxes, which fall on the phase between the end of manufacturing and sale to end user of the product, are levied after a product has already paid central levies. Consequently, taxes in India have a cascading impact.
The transition to GST is expected to end the cascading impact and make Indian industry more competitive.
Industry lobbies such Assocham and CII have proposed different models to shift to GST. The variety is on account of legal complications involved in the transition.
The Constitution divides taxation powers between Centre and states. A GST model, which needs a constitutional amendment, would have to be approved by two-thirds of Parliament and 51% of state legislatures.
A GST model which would not need a constitutional amendment, suggested by Assocham, would require a common tax base. Once the tax base is in place, the revenues collected would be split between Centre and states in a pre-determined ratio.
Another GST model suggested by Assocham, which would need a constitutional amendment, splits products and services between the Centre and states, with each having exclusive taxation rights over their respective sectors. The final GST model will come out of discussions between the Union finance minister and an empowered committee of state finance ministers, said Shome.
The empowered group on VAT will now be addressing the issue of transition to GST at a meeting on 14 April. A finance ministry official said the terms of reference of the empowered group were being suitably modified.