Centre likely to accept demand for 2-tier GST  

The Centre is likely to back the two-tier duty structure suggested by states for the proposed goods & services tax (GST), signalling significant progress in efforts to finalise the framework for this crucial indirect tax reform, scheduled to roll out from April 1, 2010, a finance ministry official told ET.

The two rates being considered under the two-tier GST structure are 8-10% and 16-18%. There will also be a special GST rate of 1% for precious metals such as gold, silver and platinum, besides a list of exempted items.

The two-tier structure would benefit both consumers and industry as most inputs and essential items would attract the lower tax rate while finished goods would fall in the higher slab. However, a final decision on actual rates would be taken later as some states and the Centre are yet to iron out differences on exemptions and the state taxes that are to be merged with the GST.

The proposed structure would have to be incorporated in the overall GST, which would have two components, central GST or cGST and state GST or sGST. Now, both cGST and sGST would have two rates each, a floor rate and the standard higher rate. Assuming that the rates mentioned earlier are adopted, the lower slab in both cGST and sGST would be 4-5% and 8-9% on items in the higher slab.

Though this may appear to be a complicated arrangement, the dual-rate GST structure is successfully followed in Canada, which also has a federal system. The GST is key to integrating the fragmented national market. The GST regime would allow seamless inter-state movement of goods and delivery of services.

Apprehending problems with the levy and collection of tax on inter-state transfers, the Centre is also likely to propose the concept of integrated-GST or iGST. To prevent inter-state disputes, this levy would be collected by the Centre and then distributed to states depending on the place of origin and eventual sale of goods. This would ensure that all business-to-business sales from one state to another do not encounter any hiccups.

Tax experts, however, said a single-rate structure is more rational and simple to implement. “A multiple-rate structure could lead to classification disputes,” said R Muralidharan, executive director, PwC.

The Centre’s decision to back the dual-rate structure is a major concession taken in the interest of speeding up the finalisation of the GST structure. The Centre had always mooted a single-rate GST to replace major indirect taxes—excise, service tax, VAT and other state levies.

Source : Economic Times, India,  dated 07/10/2009