Moving to Goods and Services Tax

The stage is finally set for the most important reform on the indirect tax front with the states agreeing to a dual goods and services tax (GST) structure.

However, the compromise reached may be far from ideal, given that there could be multiple rates for taxation of goods as indicated by the chairman of the empowered committee of state finance ministers. Thankfully, states have agreed on a common rate to tax services.

Nonetheless, a less than perfect structure is better than delaying the transition to GST for want of an agreement on a single rate of tax or a unified structure as proposed by the Kelkar committee. True, in India with its wide economic disparities, moving to a single rate would be politically difficult, though not impossible. Thus, many essential goods will have to be charged at a concessional rate, much like in the case of the state VAT structure.

In doing so, state FMs must agree to keep the divergence from agreed rates at the minimum, as that is critical to prevent diversion of trade. Clarity on the GST structure might emerge after the empowered committee submits its report to the finance ministry next month. The Centre, when it makes the final decision on sharing taxation powers with states, should take cognisance of the requirements for resources at the state level to implement various development projects in the areas of health, education, housing and rural infrastructure.

To affirm their commitment to implementing GST, the Centre and states would do well to lay out, in their next budget statements, the roadmap for implementing the proposed tax, along with the tax rates they hope to move to for goods and services by 2010.

The government’s agenda for indirect tax reforms is now on the way to completion. Of course, there are issues such as reduction of peak customs duty and leakages of revenue that need to be addressed. The Centre needs to pursue its unfinished agenda on the direct tax front with equal fervour.

The plethora of exemptions allowed to corporations under various sections of the Income-Tax Act needs to be cleaned up. Individual assessees would also benefit from some clarity on the plans to move to the exempt-exempt-taxed (EET) regime.

Source : Economic Times - Gurgaon, Haryana, India, dated 30/11/2007