Centre in favour of a flawless GST

Written by Satya Poddar | Updated: Feb 27 2010, 06:20am hrs
The big news in the Budget on the indirect tax front is a reaffirmation by the government of its plans to introduce GST by April 1, 2011, which has been labelled as a game changer by the 13th Finance Commission. While the finance minister emphasised the need to build consensus with the states, indications are that the finance minister is generally in favour of the flawless GST model recommended by the 13th Finance Commission.

The government has made a modest start by creating a Technology Advisory Group under the chairmanship of Nandan Nilekani to look into technological and systemic issues in implementation of GST (and such other unique projects). Much more is needed to develop a GST road map and actual implementation of the various tasks.

Pending the introduction of the GST, the government has not shied away from major adjustments in the structure and burden of excise duties. The partial rollback of two percentage points was largely anticipated and supported by the industry. Under the new structure, a common tax rate of 10% for excise duties and service tax will facilitate harmonization of the two.

The major structural changes are a substantial increase in the scope of service tax, increase in excise duties and taxes on petroleum products and tobacco and decrease in duties and taxes for selected sectors such as agriculture, food processing, environment, infrastructure etc.

The service tax is being expanded to all air travel, both domestic and foreign and in premier as well as economy classes. Currently, tax only applies to foreign travel in premier classes.

Significant amendments are made in the taxation of commercial property rentals and construction of residential and commercial complexes. Construction of residential properties would now attract the service tax even where the builder enters into a contract for a sale of a completed unit and not for rendering construction services.

The increase in excise duties on petroleum products and an increase of Rupee 1 per litre can be seen to be a move in the direction of eventual decontrol of petroleum prices.

The increase in excise duties on cigarettes of Rs 150-200 per thousand sticks of cigarettes should also be welcomed as a necessary move to discourage tobacco consumption. However, the overall effective tax rates on tobacco are very low in India because bidis, which account for over 50% of tobacco consumption, are either exempt or attract very low excise duties. These gaps need to be addressed to make excise duties an effective deterrent for tobacco consumption.

There are several measures targeting agriculture and food processing to reduce wastage of perishable food before it reaches consumption and processing centres, to convert such produce into value added products and to encourage new technology to augment agricultural production. The tax measures take the form of full or partial reduction of customs duties, central excise and service tax.

On the environmental front, customs duty and excise tax relief is provided on machinery and equipment for photovoltaic, solar thermal power units and rotor blades for wind energy generators. While these are welcome initiatives, such inputs would automatically be relieved of any excise tax burden under the GST. GST would obviate the need for such tinkering adjustments in future.