April 11, 2009
A further rejig in service tax and excise duty rates may be on the cards after the upcoming general elections to pave the way for the proposed goods & services tax (GST). According to a study commissioned by the 13 th Finance Commission, a revenue-neutral rate for GST would be just over 16%.
As part of its mandate, the 13 th Finance Commission is reviewing the planned structure of GST to assess its impact on the Centre and states’ tax kitty. It will come out with a new basis for devolution of taxes between the two. Vijay Kelkar, one of the key architects of GST in India, heads the commission. GST will subsume service tax and excise duty, along with a plethora of state-level taxes and duties, and is scheduled for introduction from April 1, 2010.
“The 13 th Finance Commission may be using a 16% rate of GST for its own purpose, but the exact rate will be decided only after the new government is elected, and there are discussions between the Centre and the states,” a finance ministry official said. The empowered committee of state finance ministers and the Union finance ministry have already agreed upon a dual GST structure, with separate rates for the Centre and the states. But discussions on the rate of the proposed tax are yet to begin.
While the Congress party in its election manifesto has reiterated its promise to press ahead with the proposed GST, the BJP has said it would ensure that the tax is introduced on schedule, but at a rate of between 12% and 14%.
After the three stimulus packages, service tax is now levied at 10%, while the median excise duty is levied at 8%. States impose value-added tax (Vat) at rates of 4% and 12.5%. For GST to be levied at 16% or even lower as promised by the BJP, tax experts say that other taxes would have to converge.
Convincing the states to lower taxes, however, won’t be easy. State governments have not evinced much keenness to reduce the Vat rate to align it with the central excise duty. At present, the highest rate under Vat is 12.5%, which is higher than the new median Cenvat rate of 8%.
“A GST rate of 16% will help industry become more competitive. Due to simplification of the indirect tax regime through GST, there will be better compliance and will also cause fewer revenue losses to the exchequer,” said PwC ED R Muralidharan.
[Source: The Financial Express]