Center Proposes 3 tier GST Rate Structure, Compensation to States for revenue Loss ; Consensus emerging on GST structure

Finance Minister Pranab Mukherjee today proposed a three-rate structure for the Goods and Services Tax -which will simplify the indirect tax regime – under which goods will attract 20 per cent levy, services 16 per cent and essential items a concessional 12 per cent. Mukherjee proposed these rates to the state finance ministers at a meeting here today to evolve consensus over GST that is planned to be implemented from April 1, next year. 

All central and state taxes like excise, VAT and service tax will be rolled into GST, once the new regime comes into effect.

The revenue from GST will be shared equally between the centre and states, implying that out of 20 per cent tax proposed for goods, 10 per cent each would go to the centre and the state concerned.

Similarly, in case of services, the revenues would be equally shared between the centre and the state.

Besides the maximum rate of 20 per cent, Mukherjee has also proposed a lower rate of 12 per cent for essential items. This too will be shared euqally between the centre and states at 6 per cent each.

While elaborating on the dual rate structure for goods, Mukherjee said, “The peak effective rate will be about 15 per cent which will be quite acceptable to the trade and industry.”

The 15 per cent could be the effective average rate as a result of the dual rates for goods.

The Minister assured the states that the Centre would “step up the amount of compensation recommended by 13th Finance Commission should the need arise, based on a mutually agreed formula.”

The Commission, which advises on revenue sharing between the Centre and states, had asked the union government to set aside Rs 50,000 crore to compensate states for the possible revenue loss incurred on account of implementation of GST.

The Centre and states came closer to a deal on the structure of the ambitious indirect taxes reform, the goods & services tax (GST), after the finance minister agreed to compensate the states fully for any possible loss of revenue from shift to the new tax, brightening the prospects for its rollout from April 1, 2011.

However, a few hurdles remain in the form of apprehension that the proposed structure would erode the states’ constitutional power to levy taxes, but these are being addressed by the finance minister at the level of political parties as well as at the level of state governments.

“We have made remarkable progress on major issues…The convergence process between the views of the states and the Centre has progressed significantly and a consensus is emerging on the GST structure,” said panel head Asim Dasgupta, who is also the finance minister of West Bengal.

The Centre has proposed a three-rate structure for GST, in line with the recommendations of the empowered committee of state finance ministers, under which goods will attract a levy of 20%, services 16% and essential items a concessional rate of 12%.

The levy is proposed to be split evenly between the states and the Centre.

The panel had suggested a dual-rate structure for GST with a 10% rate for essential items and 20% for others.

Finance minister Pranab Mukherjee also told the empowered panel that the GST should eventually move to a single-rate 16% (8% plus 8%) structure in the third year of its operation. In the second year, the rates are proposed to be lowered to 12% for essential goods, 18% for others and 16% for services.

Experts welcome progress on GST

A list of 99 essential items exempt under the value-added tax regime will not be taxed under the GST as well.

Foundation for Public Economics and Policy Research director Mahesh Purohit welcomed the progress. “It’s a good beginning even though it is not the most ideal structure as it proposes multiple rates. A three-year rollout period will ensure that both the Centre and states get some experience about administering the tax, before they move to a single-rate structure.”

Mr Dasgupta, however, remained non-committal on the rate structure proposed by the Centre. “…Rates are determined almost at the end. Certain rates were proposed by the Centre. We are discussing among ourselves. We can’t go public unless we form the final view,” he said.

Alcohol, petroleum and electricity would remain outside the GST structure.

The GST is India’s most ambitious indirect tax reform that would replace existing state and central taxes such as excise duty, service tax and value-added tax and purchase tax.

It is a consumption tax that will create a seamless pan-India market and also bring down the total incidence of taxes on goods and services by eliminating levy of tax on elements of tax already built into the price of a good or service before that stage of taxation (known as cascading of taxes).

By lowering business costs, it would boost economic growth and increase exports, analysts say, and bring India in line with practices in many developed economies. Reducing production costs would make exports more competitive.

CII DG Chandrajit Banerjee said: “We are happy that there is a consensus between the Centre and the empowered committee on the design of GST. This would pave way for introduction of GST from April 2011, which industry is very keen for and we see this as a very positive move.”

The Union finance minister has assured the states about the Centre’s willingness to go beyond the recommendations of the 13th Finance Commission on compensating states for any revenue loss due to GST implementation, Mr Dasgupta told reporters after the meeting of panel with finance minister Pranab Mukherjee.

The 13th Finance Commission has proposed a Rs 50,000 crore compensation package for the states for possible loss of revenue after putting in place the GST regime.

Mr Mukherjee also assured the states that the compensation for subsuming Purchase Tax on foodgrains in GST will be provided along with VAT compensation for the next four years. A reference will be made to the 14th Finance Commission to address the issue for the period beyond 2013, he said.

The draft Constitution amendment bill has also been circulated to the states. “We will discuss the proposals and will meet again on August 4,” he said.

Mr Dasgupta said the target is to see that the Centre can introduce the Constitution amendment bill in the monsoon session of Parliament.

However, some murmurs of dissent are coming from BJP-ruled states which have objections to the Centre’s proposal of a uniform threshold of Rs 10 lakh and losing their power to unilaterally increase or decrease tax rates.

The constitutional amendment also proposed creation of a panel akin to the empowered committee of state finance ministers but headed by the Union finance minister. It is proposed that any change in tax rates shall have to be approved by a three-fourth majority to ensure that there are no distortions in the GST.

“The rates proposed cannot be disputed. Our only concern is whether we will continue to have the freedom to levy, increase or decrease taxes,” said Madhya Pradesh finance minister Raghavjee. Similar views were echoed by finance minister of BJP-ruled Karnataka.

But Mr Mukherjee is not leaving any stone unturned to get the reform rolling. He has not only met state chief ministers but is also meeting the leaders of political parties including BJP, RJD and the Left to garner support.

The far-reaching reform was proposed in 2007-08 budget and was to be originally rolled out from the current fiscal. Evolving a consensus on the tax has been an arduous tasks as states were not keen on giving up their right to levy taxes.

It is now proposed to be rolled out from April 1, 2011.

“GST, a landmark reform of indirect taxes, is well within our reach. It is now for us to convert it into reality,” Mr Mukherjee told the state finance ministers.

Unique Identification Authority chairman Nandan Nilekani has also been roped in to ensure the IT infrastructure required for the smooth launch of the tax is in place.

Consensus Emerging

A consensus is emerging between sates and the federal government on the goods and services tax structure (GST), Asim Dasgupta, the head of the panel of state finance ministers on GST said on Wednesday.  The GST, India’s most ambitious tax reform, was to have been implemented from April 1, but disagreements with states meant the federal government could not meet that deadline. The government hopes to introduce a legislation to usher in GST during the parliament session that begins on Monday, officials have said.

3-TIER GST MAYINCREASE TAX BURDEN

The proposed three-tier Goods and Services Tax (GST) structure unveiled by Finance Minister Pranab Mukherjee on Wednesday will increase the tax burden on the common man, say experts.

“There could be some reduction in the cascading effect, but overall, tax burden would go up for common man,” Ernst & Young Tax Partner Bipin Sapra said.

Finance Minister Pranab Mukherjee today proposed a structure for the GST — which will simplify the indirect tax regime — under which goods will attract 20 per cent levy, services 16 per cent and essential items a concessional 12 per cent.

“If the manufacturers pass on their benefits to consumers, then only their tax burden would reduce,” opined BMR Advisors Partner Indirect Tax Practice Rajeev Dimri.

The chambers, however, are divided over the impact of GST on industry. While the Confederation of Indian Industry (CII) and Assocham have welcomed the announcement, FICCI expressed its reservations.

“This structure will not serve the purpose (of GST)… the rates are on the very, very high side,” FICCI said.

CII Director General Chandrajit Banerjee, however, said “There is a consensus between the Centre and the Empowered Committee on the design of GST. This would pave way for introduction of GST from April, 2011, which industry is very keen for and we see this as a very positive move.”

The proposal, according to Assocham, “is most equitable distribution of GST, which industry will have to accept and adjust after implementation of the new indirect tax regime.”

The proposal, opined Sachin Menon, Head Indirect Tax, KPMG, “will not result in much gain for manufacturing. Ideally, the service and goods tax rate should have been the same.”