DTC would boost consumption     

The proposed goods & services tax (GST) holds the promise of fulfilling two key economic objectives simultaneously: ensuring revenue buoyancy and fiscal consolidation. Not only would GST be a win-win option for all stakeholders—the business community, government and customers—it would also result in a transformation of the indirect tax landscape by providing a more rationalised and simplified dispensation. It is in the interests of all that GST is introduced without further delay.

GST means a higher tax incidence on commodities that are hitherto exempt or subject to a lower rate of tax, and a lower tax incidence on commodities and services that are at present subject to higher rates of taxation. The eventual convergence to a single tax rate will result in higher levels of compliance and operational ease in tax administration.

The new Direct Taxes Code (DTC) is another revolutionary reform. It intends to replace the existing Income-Tax Act, which has undergone tremendous changes and amendments over time and has become extremely complicated and prone to litigation. The code, if implemented, will increase compliance and widen the tax net. In the present proposal, it is expected that the tax burden on assessees will diminish. This would boost consumption and trigger economic activity.

Some of the proposals in the DTC have far-reaching implications like a reduction in corporate and individual tax rates, which would widen the tax base. The minimum alternate tax on gross assets would be a dampener on capital-intensive industries with long gestation periods, but sectors like IT would benefit.

Overall, a net reduction in tax rates is a welcome sign to increase corporate and individual savings. Alas, it is only a draft proposal now.

The GST model must have the support of all stakeholders and cannot be insensitive to the practical realities of our federal structure. To start with, even a less-than-perfect GST would be in order. And perhaps within a couple of years, the model can be perfected in the light of experience, while maintaining the government’s revenue considerations.

Undoubtedly, subsuming all indirect taxes presently levied by central and state governments, including stamp duties, would be an ideal situation. However, even if an indirect tax like stamp duty is not included, the objectives of the GST would not be vitiated. As suggested by the 13th Finance Commission, perhaps stamp duties can be subsumed within GST in a phased manner.

Again, it would be wise to include alcohol and petroleum products within GST to ensure a seamless credit chain. To protect the government’s revenues, perhaps a non-creditable additional uniform duty can be considered on these products, which, too, is gradually phased out. A comprehensive GST model that consists of a single rate for goods and services should optimise the tax and transaction costs for business.

Source: Financial Express, India, dated 16/02/2010