Fin panel moots dual rate for GST, end to all sops

Fin panel moots dual rate for GST, end to all sops
The Economic Times, December 16 2009, Page 9

ET Bureau, NEW DELHI

A task force on GST set up by the Thirteenth Finance Commission has recommended the tax on all goods and services be dropped to 5% at the Centre and 7% at the state level, and that all exemptions be scrapped. It does not, however, recommend a concessional rate for essential items, as is the norm at present with the central excise and state value-added tax.

The task force recommendations need not form the basis of any decision on GST framework made by the Centre and states, both of which are at an advanced stage of finalising their proposals for a dual GST. However, it would serve as an input for the Finance Commission to work out the formula for sharing Centre’s tax revenues with states.
Tax experts, however, doubt whether the recommendations would be acceptable to states, even though revenue gains from implementing the proposals of the task force could be Rs 70,000 crore.

The report suggests that states as well as the Centre completely give up their discretion to effect any changes to tax rates unilaterally.

The changes will have to be approved by a council of ministers, which would have the state finance ministers and the Union finance minister as members. States would see this as an encroachment on their fiscal autonomy. The council is to be a constitutional body, unlike the empowered panel of state FMs which is a toothless body.

The panel has recommended that exemptions given to SEZs be scrapped, and instead all goods and services exports be zero-rated . Only public services provided by all levels of government, unprocessed food covered by the PDS, education and health are to be exempt.

Other far-reaching recommendations include bringing real estate into the ambit of GST. Thirteenth Finance Commission chairman Vijay Kelkar had been keen on this, and said as much at various fora. GST on real estate would benefit homebuyers. Prices would fall as developers would get credit for taxes paid on all inputs.

Said KPMG India executive director (indirect tax & regulatory services) Pratik Jain: “The overall perspective and direction of the recommendations are good—tax rates can be moderate only when the tax base is broadbased.”

The impact of broadbasing the tax and dropping the rate would be mixed. At one level, tax rates on most items will plummet, translating into lower prices for buyers. The report suggests the transition to the “flawless GST” would result in a 1.22-2 .53% drop in the prices of most manufactured goods.

Conversely, a host of items that are currently outside the tax net or enjoy concessional rates—such as agri commodities and services —may become slightly expensive.