GST code released; April 1 launch unlikely

GST code released; April 1 launch unlikely
The Financial Express, November 11, 2009, Page 1

fe Bureau, New Delhi

India moved a giant step closer to its most radical indirect tax reform in many decades with a panel of state finance ministers unveiling a discussion paper on the goods & services tax (GST), a new levy that would replace most indirect taxes at central and state levels.

The paper, described as “initial,” said GST would have two components—central and state—with both applicable on a largely uniform base across the country with minimal rate variations and as few exemptions as possible.

However, with several issues remaining unresolved, there were clear indications from both Union finance minister Pranab Mukherjee and chairman of the empowered committee of state finance ministers Asim Dasgupta that introduction of GST would miss the proposed April 1, 2010 deadline.

The discussion paper amounts to a significant compromise on what experts think an ideal GST structure should be, as it kept petroleum goods and alcoholic beverages outside the purview of the proposed tax. Also, purchase tax on foodgrain would be kept out, although a tax on sales by definition should be subsumed in GST. Octroi, a cumbersome levy that exists in Maharashtra, the most industrialised state in the country, would also be outside the GST ambit.

The paper suggests a dual rate structure for goods at the state level and expects the Centre to follow suit. Services, however, will be taxed at a single rate. The paper shies away from prescribing tax rates. It does not describe unambiguously the taxation and revenue-assigning procedures for inter-state services like telecom and financial intermediary services. Neither has it spelt out the norms for inter-state transactions of services.

The panel of state finance ministers has prescribed the adoption of an IGST on inter-state trade, which will be administered by the Centre. IGST will effectively be an instrument for transfer input credit from one state to another, rather than a cost to businesses. The transfer of revenue between states would be on a netted basis, with fixed periodicity.

The GST structure outlined by state finance ministers would now be critically examined by the Centre and other stakeholders, including industry, before the Centre initiates a process to make the requisite Constitutional amendments and other legal changes.

“The first discussion paper of the empowered committee has come today, which will be followed by discussions with trade and industry. We at the Union finance ministry also need to look at it, and there are also legislations and Constitutional amendments required. Completing all these processes will take time. We will have to have a full-fledged GST,” Mukherjee said.

Significantly, some states still are not fully on board, another stumbling block for implementation of the tax. “There are still some difference amongst states… each state has its own local nature and problems,” Dasgupta said.

The discussion paper gives more leeway on the threshold for the tax. It has called for a uniform threshold of Rs 10 lakh for goods and services at the state level, but proposed adequate compensation for states in the northeastern region and special category states that have a lower threshold prevailing under the extant value-added tax regime.

For Central GST, it has proposed that the threshold should be kept in sync with the current position. For goods, it may be kept at Rs 1.5 crore and can be appropriately high for services. “Such multiple thresholds will be highly problematic for a harmonised GST,” said Ernst & Young partner Satya Poddar.

“The GST structure is more or less in line with the expectations of trade and industry. However, a re-look is needed into certain areas such as the exclusion of petroleum products from GST as well as other open areas like the purchase tax. The other important part of GST, the rate structure, also needs to be finalised,” said PricewaterhouseCoopers executive director R Muralidharan.