Posted on January 12, 2011 | View 429 | Comment: 1
Implement it at the central level Those who cannot remember the past are condemned to repeat it, said philosopher George Santayana. The goods and services tax reform, like the value-added tax reform that took over 10 years to complete, is stalled like a bullock cart stuck in mud. Restarting the reform is a challenge but an opportunity for the finance minister to secure a place in history as a statesman.
A two pronged strategy is needed to re-start the reform process. First, the FM can simply implement GST at the manufacturing stage at the central level in the forthcoming Budget itself and this does not require a constitutional amendment. It only requires the Centre to revisit the exemption list, unify the Cenvat rates and extend the tax to all services. With a common threshold and rate on both goods and services, the GST at the manufacturing stage becomes a reality. The threshold for both goods and services could be fixed at . 50 lakh of the manufacturing turnover and sales turnover respectively, and the tax may be levied at a uniform rate of 10%. A separate sumptuary tax can be levied on cigarettes.
The second strategy comprises motivating the states to restart the reform process. This implies making compromises on the design and implementation. In fact, even some bad features may be included in the design to get the reform process moving. Thus, the states could tax at two rates instead of one and levy the tax at floor rates instead of fixed rates.
Broadly, they may start with the floor rates of 5% and 10%, which is broadly the revenue-neutral rate. On sumptuary items, tobacco products, motor spirit, high speed diesel and a few items of luxury consumption, in addition to GST, the states may levy a special excise at the floor rates decided collectively.
The Centre should fully compensate any shortfall in revenue estimated at the floor rates, including revenue from central sales tax, for the first three years. The reform could be implemented from April 2012.
The progress in revenue collections should be monitored and in 2015, the rate structure could be realigned, if necessary.
M Govinda Rao
Director NIPFP
Continue dialogue with states A consensus on the goods and services tax continues to be elusive, despite the first discussion paper on the new regime. But the scope for any incremental change or transitional measures such as a GST at the central level is limited. At present, goods and services are taxed at 10%. Input credit is also available across goods and services.
A tax on all services at this stage without any corresponding relief will only increase the tax incidence on goods. Lowering the small-scale threshold exemption from . 1.5 crore will hurt the small scale sector.
The scope for incorporating GST features at the state level has become limited after the implementation of VAT. Many states, though, are agreeable to subsuming a number of state levies and harmonising tax rates and procedures.
States may have some psychological comfort to move forward if they have the option to raise the floor rate within an agreed band. A flexible approach on exemptions may also be needed to start with.
What is feasible at this stage is the adoption of procedural changes that are required for a national-level GST. Common registration, electronic filing of returns, e-payment, electronic monitoring of inter-state movement of goods, standard classification and so on should be done in the near term.
A consensus is also needed on a common IT platform and the infrastructure should be in place ahead of the transition. The revenue impact of GST also needs to be assessed properly. Definite numbers are a must to convince stakeholders to switch to GST.
This exercise has to be done in a transparent way in coordination with states and experts in the field. An assessment of the revenue implications will also be helpful.
The Centre must keep the process of dialogue on with the states and respond to their concerns including apprehensions over the infringement of their autonomy.
New Zealand, for instance, announced a relief package for sectors that would be impacted by GST, ahead of its introduction. Identifying and finding agreeable responses to issues through a dialogue is the only way forward.
R Sekar
Former Jt Secy Ministry of Finance
Comment
Comments (1)
- GST is a very simple concept and can be implemented forthwith.
Excise duty 16%+state VAT12.5% sum upto 28.5%. Value Addition means Raw Material Costs plus all manufacturing expenses, administrative, selling & distribution expenses and financial expenses. GST paid for any of these costs must be treated as INPUT GST and allowed to be set-off against liability to pay Output GST. This will ensure that all business entities will insist for Purchase bills, whether these are for Raw materials, Pcaking materials, stationery, power, phone, petrol, diesel, hotel and all sorts of bills related to any of the costs. GST should be 30% i.e. 17% for the Central Government and 13% for the State Government to be paid into State treasury, which will bifurcate the amount between state and Central Govt ...See More
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