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In a move
that has more to do with politics than economics, the
states proposed a lower GST rate for items of mass
consumption, a regular rate for other goods and a
nominal charge of 1% on precious metals. There will also
be a small list of goods exempted from this tax.
Announcing this, West Bengal finance minister (FM) Asim
Dasgupta added that the agreement between state
governments did not cover services.
A single
GST was to replace a tangled web of national, state and
local taxes and would have been the culmination of a
long process of indirect tax reforms that began in 1991.
GST in its pristine form was expected to help firms
produce more efficiently and give consumers more clarity
about the taxes they paid on goods and services.
The new
tax structure proposed on Wednesday is similar to the
value-added taxes (VAT) that states currently impose,
though GST was envisaged as an improvement over the
current system.
The states want multiple rates to stem revenue losses as
well to hold the price line of some goods. Mint had
reported on 31 August that state governments were coming
around to a multiple-rate GST to ensure that mass
consumption goods are spared a higher rate.
Dasgupta, chairman of the empowered committee of state
finance ministers, the group that has to chart out the
roadmap for GST, declined to disclose the rates for
different categories of goods. However, FMs who
participated in Wednesday’s meeting said the normal rate
was likely to be around 5% and the standard rate could
be anything between 8% and 12.5%.
Besides the states, the Union government too will charge
its GST rate, which was earlier expected to be 8%.
After Wednesday’s developments, Dasgupta is scheduled to
meet FM Pranab Mukherjee on 8 October.
In the past few months, negotiations among states have
run into difficulties (Mint, 31 August) as richer states
such as Maharashtra did not always have the same
interests as poorer ones such as Madhya Pradesh.
According to a state FM, Wednesday’s compromises
reflected Dasgupta’s aim to narrow the differences and
get GST off the ground. Subsequently, GST could be
reformed to achieve the original objective, the minister
added.
“We don’t have any time to lose,” Dasgupta told the
media, after announcing that bureaucrats from the Centre
and states would assemble into working groups to prepare
a framework for constitutional amendments and a “model
GST legislation”.
“It’s a very confusing decision. The decision tends to
be at a very high political level. There is no process
yet for working out operational details,” said Satya
Poddar, partner at audit and consultancy firm Ernst and
Young.
A negative implication of Wednesday’s decision by the
empowered committee is that it may become difficult to
counter litigation arising out of disputes on
categorization of goods and services, he said.
Currently, some of the outstanding disputes are on
pre-paid mobile phone cards and packaged software where
the tax department and firms differ on categorization,
which attracts different tax rates. In “value-added
services” such as these, a single GST would have removed
the root cause of disputes, Poddar said.
With states asking for three rates, “the best thing to
do (would be) to have items at standard rates, which can
be blended into services”, he said.
According to the state FM at Wednesday’s meeting, states
are open to charging 8% as a uniform tax rate for
services. If the Union government adds the same rate on
services, they will be taxed at 16%, compared with the
current level of 10%.
Today, service tax is levied exclusively by the Union
government, but a part of the proceeds is shared with
states according to the formula fixed by the Twelfth
Finance Commission.
Identifying the items of mass consumption that would
attract the “lower rate” is expected to be tricky, as
each state has unique needs.
For instance, Madhya Pradesh FM Raghavji (who goes by
one name) pointed out in the meeting that the state has
kept cereals, pulses and sugar out of the VAT net
“despite incurring substantial revenue loss to give
relief to the poor”.
A written copy of Raghavji’s speech pointed out the
proceedings of the empowered committee have given an
impression that foodgrain would be taxed under GST.
After the meeting, Dasgupta said foodgrain were
discussed, but there is no consensus on its
categorization as yet.
To mitigate fears of some states that they would be
steamrolled into accepting categorizations that would
harm their interests, Dasgupta said states would be
allowed to choose goods of local importance, which could
be kept out of GST.
Source
:
Livemint, India, dated 17/09/2009
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