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

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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.

revenue-neutral rate of GST and dual-centre state controls.

Observers feel that there could indeed be an announcement on the transition to GST in Budget 2013-14, although it is unlikely that the rates would be announced. The states have secured a favourable view form the Centre on their having the flexibility to move rates within a narrow band for items of local importance and considering revenue exigencies.

Chidambaram, sources said, is likely to make “positive noises” about the proposed unified indirect tax regime. Keen to revive the economy, the finance minister is using his negotiating skills for a grand political give-and-take deal on the three outstanding issues with states. He is also likely to emphasise in his budget speech the progress made on GST such as the agreement on compensation and the flexibility given to states to decide when to adopt GST.

Experts said that a compromise on the nature of GST as a destination-based consumption tax could affect the cost competitiveness and other economic benefits it is projected to bring. As part of introducing GST, the central sales tax that goes to producing states will be abolished. In the new regime, the state component of GST would go to the consuming state on both sale of goods as well as on stock transfers.

“Claims that interstate GST proceeds going only to the consuming states being unjust to the manufacturing states are not fair at all. To realise the full benefits of GST, it is incumbent upon all to have a consensus on the design of GST and to stick to it,” said Prashant Deshpande, senior director, Deloitte.

“The philosophy of GST is of a destination-based tax. It should stay so,” said Harishanker Subramaniam, indirect tax partner, Ernst & Young.

At the Bhubaneswar meeting of the empowered committee of state finance ministers last week, the Centre and states agreed on including petroleum products within GST with states having the power to levy extra taxes on them without input tax credit facility, dropped the proposal to have a Dispute Resolution Authority chaired by a judge and decided on a phased roll-out of the new tax regime.

While states agreed to including petroleum products in GST as suggested by a task force set up by the 13th Finance Commission, a revenue-neutral GST rate to be introduced from 2014-15 is still elusive. The global average GST/VAT rate is around 16.4%. The average rate in the

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