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This
needs to change, for a variety of reasons. The intention
is therefore to ensure that while absolute tax revenues
will all grow in tandem with the country’s economic
growth, as also the expenditure needs of the Government,
the composition of federal revenues changes in order to
place a relatively larger reliance on direct taxes and and
a relatively lesser degree of reliance on indirect taxes.
This
is sought to be achieved by both a broadbasing of the tax
base, together with elimination of exemptions, and by a
moderation of the tax rates in themselves, particularly
indirect tax rates.
If
this be the context for a discussion on the appropriate
aggregate rate of the GST, it will be fair and reasonable
to assume that GST should bring about a reduction in the
overall indirect tax rate.
To
expand on the point, there is, today, a multiple tax
structure at the federal level relating to the excise duty
or CENVAT, being the tax on goods, and the service tax,
being the tax on services. While the excise tax is in
excess of 16 per cent, the service tax is approximately 4
percentage points lower.
A
further complication is that the excise duty is not a
single rate but is comprised of rates both lower and in
excess of the 16 per cent. At the State level again, the
current position is complex. While the general State VAT
rate is 12.5 per cent, there are again other rates which
are both in excess of and lower than the aforesaid rate.
On
the understanding however that the typical excise
duty/State VAT rates are 16 per cent and 12.5 per cent,
the aggregate indirect tax that is typically charged on
manufacture and sale of goods in India would be the total
of these two taxes.
This
is however incorrect since the excise duty is paid on the
manufacturer’s sales price (which need not correspond to
the retail selling price) whereas the VAT is effectively
paid on the price at which such manufactured goods are
ultimately sold in retail.
In
other words, the bases on which the respective taxes on
goods are paid, at the federal and State level, are
different. Further, the State VAT is also charged on the
excise duty, thereby leading to cascading. In order to
correctly understand the aggregate incidence of the
present indirect tax, it is necessary to compute it on a
common base, which arguably could be the retail sales
price.
The
aggregate incidence of tax is approximately 36 on the
retail sales price of 162. This works out to approximately
22 per cent. Of course, the figures will change if the
value addition percentages were to change but the broad
point is that typically the aggregate incidence of
indirect tax at present, on a common retail sales price
base, would range from 22 per cent to say 25 per cent.
If
an assumption were to be made that the aggregate incidence
of tax under the dual GST would need to reduce, a fair
expectation would then be that the aggregate incidence of
the dual GST should be approximately 20 per cent.
There
is apparently a consensus of opinion in the relevant
decision making quarters that this should indeed be the
case. However, the further point to be noted is that the
dual GST, as understood, will be charged on a common base.
We do not yet know what that common base would be, but it
appears certain that the present base of the excise/CENVAT,
of the manufacturers sales price, would not be relevant in
the GST.
This
would mean that the federal GST on goods would no longer
be a manufacturing tax but would be predicated on a yet to
be defined taxable event.
It
could be that the federal GST, as also the State GST,
could both be predicated on supplies of goods, to be
defined in an appropriate fashion. It must be noted here
that globally the VAT/GST is typically based on a set of
rules which define the place as also the time of supply of
goods in order for the tax to apply.
A
related point would be that under dual GST, there would be
no cascading. Thus both the federal and State GST would be
charged on an appropriate common base, thereby eliminating
the problem associated with a tax on tax. This will
further reduce the overall tax incidence.
The
last relevant point in connection with this discussion is
regarding the respective rates of the federal GST and
State GST. There is no news yet as to what these
respective rates might be, but there is some discussion on
a 12 per cent federal GST and an 8 per cent State GST but
it could be that they could both be at 10 per cent each,
thus aggregating to the 20 per cent that has been
discussed before.
Also,
there have been past recommendations in this regard by the
Kelkar Task Force, which had recommended, among other
things, an aggregate GST of 20 per cent, comprising a
federal GST of 12 per cent and a State GST of 8 per cent.
It
will, therefore, be interesting to know what the final
recommendations of the Empowered Committee would be in
regard to the dual GST rates to be brought into effect
from April 2010.
Source
: Business Standard - Mumbai, Maharashtra, India, dated
24/12/2007
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