The country?s biggest tax reform in recent years?the rollout of goods and services tax or GST?has run into a big problem with the 4% reduction in central excise duty on non-petroleum products, announced last week.
The GST is expected to be India?s magnet to draw foreign investment. In its final shape, it offers a seamless, transparent tax structure that leaves no room for discretion with the state or central government to change rates. The unified national level goods and services tax is supposed to be introduced from April 1, 2010.
The Centre and an empowered committee of state finance ministers has been working to move most goods and services to a 14% rate. But the government?s announcement on December 7 to cut the central vale added tax (Cenvat) levied on goods by 4% means that an overwhelming majority of goods are now going to be taxed at 10%, though the tax cut has come as a part of the government?s fiscal stimulus package. But services will continue at 12%. This means the next finance minister will have to clip the service tax rate to 10% and forego significant revenue or go in for an unpopular hike in the excise tax.
Economist Bibek Debroy said, ?With such deviations in the rate structure, I expect the rollout of GST to be postponed.? Finance ministry officials, however, said they were not thinking about the rollout date for the new tax when they decided on the cut in the central excise duty. ?The objective was to boost demand. Its effect on the proposed GST was not a concern,? an official said.
The Union finance ministry and the empowered committee had already finalised a dual structure for the tax, which means the Centre and the states will both levy the tax but with different rates. One option is to go in for a combined rate of 20% to 22%, a little over the OECD average of 17.6%. But with the recent changes in the Cenvat rate, this will have to be reworked.
Rajeev Dimri, partner, BMR Advisors, said, ?In the long-term, a 10% rate for Central GST may not be feasible.? But differing from this point, S Madhavan, leader, indirect tax practice at PriceWaterhouseCoopers, feels, ?It?s a welcome move and it probably indicates that the federal GST may be capped at 10%?.
The changes have surprised the empowered committee. The group is meeting on Tuesday but it has decided to keep GST out of its agenda. In fact, after the model for the tax was approved by the Centre late last month, the empowered committee was confident of finalising rates for the tax by the end of this fiscal.