Friday, February 25, 2011

Budget 2011: Simple Tax structure right way to Goods and service Tax

India will miss the April 1, 2011, deadline to implement the goods and services tax (GST), with the BJP-ruled states playing spoilsport once again. However, an influential policy advisory body has lent some hope to speed up the reforms process to create a common market across the country. In its report released a week ahead of Budget 2011, the Prime Minister’s Economic Advisory Council (EAC) has asked the Centre to adopt GST within the existing parameters of the Constitution . This framework allows the Centre to tax goods up to the manufacturing stage and also tax services. All the Centre needs to do is prune exemptions, convert specific excise duties — in commodities such as cement — to ad-valorem rates and tax all services.
Companies and service providers with a turnover of up to Rs 50 lakh should be out of GST and those above the limit should pay a 10% tax. The EAC’s recommendations are not new. These were proposed by an expert panel chaired earlier by M Govinda Rao, a member of the EAC and director at National Institute for Public Finance and Policy. The reforms, though seen as a step forward, are incremental . Already, most goods and services attract 10% duty. Manufacturers and services providers are also given credit for the input taxes that they pay on goods and services. The threshold exemption though varies for goods and services. Even a uniform threshold exemption will be a nightmare to administer.
Fact is the transition to GST requires two crucial amendments to the Constitution. These include new powers for the Centre to tax goods up to the retail stage and for the states to tax services. So, even if the EAC’s recommendations are accepted, the Centre cannot tax goods up to the retail stage. Most states support these amendments as this will strengthen their autonomy and boost revenues. In a federal structure, the Centre must also ensure that it does not infringe on the taxation powers of states. They should have the flexibility to change GST rates, if they want to, although they should ideally not. The government has done well to address some concerns of the states. It has watered down an amendment on the GST Council, originally proposed to be chaired by the finance minister.
The GST Council, with a majority representation of states, will be a useful forum for the states and the Centre to work out fiscal sense. The Centre should, therefore, continue its dialogue with the BJP-ruled states to forge a consensus on implementing GST at least in 2012. So far, the Centre and the states have agreed to a dual GST, comprising of a central GST and a state GST. Decisions have to be taken on the rate structure and list of exemptions . But the first step is to make the relevant amendments to the Constitution. Budget 2011 will not have big-ticket announcements on GST or even a clear timetable for transition. However, preparatory work is a must. The IT system that can service GST should be up and running and the administration should be fully geared to handle the new tax system in 2012.

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