Finance panel for 12% GST

Finance panel for 12% GST
The Financial Express, November 26, 2009, Page 1

KG Narendranath, New Delhi

The proposed goods & services tax (GST) could turn out to be a far more benign impost than anyone expected. In what would amount to a radical tax reform, the 13th Finance Commission is understood to have arrived at a revenue-neutral rate of around 12%, at least 4 percentage points lower than what most believed the combined Centre-state rate would be.

According to official sources, in a technical paper the commission is going to release shortly, it would also recommend a substantial broadening of the tax base by including hitherto untaxed—but potentially high-revenue—areas like real estate deals, high-end education and healthcare services. If the proposals are accepted, India Inc’s tax liability will see a major dip.

In the commission’s ideal model, GST would subsume taxes on petroleum and alcohol, both of which states want to keep outside the new comprehensive, multi-point tax on value added. Levies on petroleum account for a third of the tax revenues of both the Centre and states. The commission, headed by Vijay Kelkar, even wants the beedi industry, which forms a large chunk of the domestic tobacco sector, to be brought under GST.

The commission’s mandate is to recommend a formula for fiscal resource distribution between the Centre and states, as well as states inter se. It is, therefore, bound to have a decisive say in finalising the GST structure, which is integral to the fiscal resource transfer policy. In fact, the commission has drawn inputs from senior finance ministry officials to prepare the technical paper.

The Centre and states continue to disagree on the structure and modalities of GST, with the former keen to use the new tax as a reform tool. So, by releasing the technical paper, the commission would help the Centre turn the table on the empowered committee of state finance ministers, which recently published a GST discussion paper that most analysts said reflected a compromise.

Real estate transactions now attract only stamp duty at the output level, whereas the output incurs input taxes like Vat on construction material and service tax on specified work contracts. “In most countries where a GST/Vat system exists, sale of property is taxed like any other transaction. All input taxes are recouped by taxpayers, except the final consumer, as credit,” said E&Y partner Harishanker Subramaniam.

The empowered committee’s model not only leaves many contentious questions unresolved, but also defeats the purpose of capturing most supply chains under GST to avoid a tax on tax. The Centre wants the two GST components--central and state--to apply on roughly the same base.

The committee’s discussion paper did not agree with this, and proposed that the threshold for goods be retained at the current level of Rs 1.5 crore for central GST and that a much lower threshold of Rs 10 lakh for both goods and services be applicable for state GST.

Another point of discord is the number of rates. While the Centre wants a single rate for all transactions on goods or services, the states have pitched for multiple rates by differentiating between goods and services, and also amongst various goods.

States have almost agreed on a lower 5% rate for merit goods, but are arguing for the higher standard rate to be 9%. Currently, items that constitute about half the state Vat base are taxed at a lower 4% and this comprises a large number of industrial inputs.

Sources said with the finance commission proposals to be out soon, states might strategically defer making any recommendations on rates to March 2010 or beyond.

Meanwhile, the Commission on Centre-State Relations, headed by Justice Madan Mohan Punchhi, is also looking into the need and relevance of separate taxes on production and sales of goods & services subsequent to the introduction of the Vat regime.