India - Goods & services tax to be in place by 2010

With the government’s working group on goods and services tax (GST) still grappling with a model for this modern tax system to harmonise indirect tax structure between the states and the Centre, the finance ministry is confident of putting in place a GST by 2010.

Set up by the Empowered Committee of state finance ministers on VAT in May this year, the working group, co-chaired by advisor to the Union finance minister, Mr Parthasarthi Shome, and the secretary of the Empowered Committee, Mr Satish Chandra, was to submit its report by this month. The joint working group (JWG) also includes other Union finance ministry officials and state chief secretaries.

Officials say the proposed switch to a GST would be an even greater challenge than the move to shift to the system of value added tax (VAT) at the state level earlier. However, given the resolve of states to have a tax system that was fairly simple to comply with and less burdensome, the officials say India would achieve the target set by the Union finance minister, Mr P Chidambaram of introducing a comprehensive GST by 2010.

To achieve this, the 13th Finance Commission would be mandated to prepare a road map for the introduction of the GST, once the government’s obligations under the FRBM Act are fulfilled. Since the Commission is a constitutional body appointed every five years, its recommendations are mandatory for the Centre and states. The Commission spells out the allocation of the tax kitty between the Centre and states, as well as the rules for inter-se allocation between states.

The working group, meanwhile, is considering various models suggested by different quarters besides studying the tax system in various countries, particularly those with a federal structure much like India.

To keep pace with the current growth trajectory in India’s economy, the finance ministry has set the ball rolling on tax reforms with the introduction of VAT. “India has moved from origin-based system of taxation of goods to destination-based system,” the Institute of Chartered Accountants of India (ICAI) council member, Ms Bhavana Doshi, said pointing to the tax reforms already undertaken. “We have introduced taxation of services and moved to a more robust system based on value-added principles. Now is the time to move to consolidation of taxes on goods and services and achieve true value added tax system.”

There are parallel systems of indirect taxation at the Central and state levels. Each of the system needs to be reformed to eventually harmonise them. With the VAT having been introduced and the Central Sales Tax (CST), which comes in the way of GST, being phased out from this fiscal, the road is slowly but surely being paved for the new tax regime.

A variety of models are available for taxation of goods and services, offering a combination of excise duties, retail sales tax and multi-point systems such as VAT and GST. The finance ministry is confronted with three alternatives ~ GST at the Central level only; GST at the state level only; and GST at both levels.