GST (goods and services tax) advent gives Centre room for hike in excise duty

Feb 14 2013, 13:50 IST
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SummaryAlthough there are various estimates by government and independent agencies of a revenue-neutral rate for the goods and services tax, it is clear that the Centre has room to raise the excise and service tax rates in the run-up to the proposed comprehensive indirect tax likely to be ushered in from 2014-15.

Although there are various estimates by government and independent agencies of a revenue-neutral rate (RNR) for the goods and services tax (GST), it is clear that the Centre has room to raise the excise and service tax rates in the run-up to the proposed comprehensive indirect tax likely to be ushered in from 2014-15. With few options to boost revenue buoyancy and a tough fiscal deficit target of 4.8% set for 2013-14, finance minster P Chidambaram might look at the option of raising the median central excise duty from 12% at present by one or two percentage points in the Budget. The policy of having a negative list of service tax might help boost revenue from this head, which still remains the fastest-growing one but has shown signs of a plateauing in the last couple of years.

After the recent Centre-state consensus on issues that so far delayed the introduction of GST, officials of the central and state governments are now struggling to agree on the structure of the “destination-based consumption tax” that militates against tax cascades and is expected to yield an additional one and half percentage points in GDP growth. As the table shows, the RNR for GST estimated by various agencies is much below the arithmetic total of central excise/service tax and state VAT rates at present. Of course, combined (Centre-state) GST rates being discussed among policymakers are much higher (from 16% to 20%) and so the Centre has flexibility to raise rates for a year.

This is not to forget that the GST base would be different from those for the central excise, service tax and state VAT at present and it includes many other levies of local nature, including entry tax and purchase tax. The GST regime will also allow states to tax services and the Centre to tax goods up to the retail level, as against the ex-factory level at present.

In spite of the Union government relenting on central sales tax compensation to states, those with a strong manufacturing base such as Gujarat protested at last week's deliberations of state finance ministers in Orissa that the tax proceeds on interstate trade going to the consuming state was not fair on them.

The other major issues on which a consensus is vital for Chidambaram to be able to introduce a revised GST Bill in Parliament in the monsoon session is a Centre-state deal on a

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