Purge purchase tax, octroi      

Some states have suggested that purchase tax, a significant source of revenue, should not be subsumed into the goods and services tax (GST). Neither the Centre nor the empowered committee of state finance ministers that has been spearheading the country’s transition to a rational indirect tax system should accept this idea. The tax must simply be scrapped.

Purchase tax is just another form of sales tax at the state level, but levied on the buyer rather than the seller of specified list of items such as foodgrain when the goods are not resold in state. The list varies from state to state. It covers foodgrain, cotton, jute and sugar among other primary products. Punjab and Haryana lead the group of states opposed to subsuming of the tax into GST as they collect about Rs 1,000 crore and Rs 600 crore, respectively, from this levy on foodgrain.

Apart from being an indirect tax that would cascade and work against producers, there is another very good reason why this levy should go. Purchase tax on the Food Corporation of India when it procures grain from farmers amounts to diversion of the Centre’s budget allocation for food subsidy towards these states’ coffers. And that is truly scandalous. To illustrate: say, Food Corporation of India had procured 20.3 million tonnes of wheat last Rabi at Rs 1,080 per quintal.

Purchase tax at the rate of 4% on MSP works out to Rs 879.50 crore. Procurement of rice was thrice as much. So, a few thousand crore rupees of food subsidy ended up in these state treasuries, for the service of procuring grain from their farmers. Leaving purchase tax intact when the country moves to GST would only embolden other states to introduce the levy, pleading fiscal autonomy. That defeats the whole purpose of introducing GST. And it is proving to be a concern for the Centre.

Exemptions from GST must be kept to the minimum. Keeping alcoholic beverages and petroleum products outside the purview of GST is bad enough. Likewise, certain local levies such as octroi that create barriers for seamless movement of goods and services should also be scrapped. Also, the threshold for levying the tax must be kept low. That alone would ensure that the overall rates of state GST can be kept low. The tax rate is a function of the size of the tax base — the larger the base, the lower the rate.  

Source : Economic Times, India, dated 16/11/2009