As the Centre and states work out the modalities of the goods & services tax (GST), the Thirteenth Finance Commission has proposed to bring construction, real estate and railways under the GST net. Including these sectors under the GST ambit would help widen the tax base and prevent tax evasion, said Vijay Kelkar, the Commission?s chairman and the architect of GST in India, on Monday.
The Commission also offered a compensation mechanism to states for any revenue loss from GST implementation.
Addressing a Assocham conference, Kelkar said, ?The construction sector is a significant contributor to the national economy. Housing expenditure dominates personal consumption expenditure. The present piece-meal taxation of this sector encourages perverse incentives.?
Admitting that the inclusion of these sectors does not figure in the ongoing discussions on GST, Kelkar cited the potential long-term benefits of their inclusion to the economy ?either immediately or during a subsequent phase.?
?Raw material is charged Cenvat, the works contract is charged VAT and stamp duty is levied on the sale. With no provision of input tax credit in place, there is little incentive to record such transactions either at the construction stage or at the sale stage at their correct value. This leads to substantial loss of tax revenue and fuels the parallel economy,? he said.
Similarly, bringing railways under GST would bring it on a level field with road and air cargo transportation and help track the movement of goods across state. Kelkar said. ?The railways themselves will benefit from this by availing of input tax credit on the significant purchases made by them,? he pointed out.
Tax experts echoed Kelkar?s views although they said this should be looked at in the long term.
?The present GST regime will be very basic where Cenvat and state VAT are merged. These services can be included in the long term, especially if we move from a dual GST to a state GST,? said Mahesh Purohit, director, Foundation for Public Economics & Policy Research.
The Commission is reviewing the planned structure of the tax to assess its impact on the Centre and states? tax kitty. It will come out with a new basis for devolution of taxes between the two.
In a bid to placate the concerns of states on possible revenue losses under GST, Kelkar said, ?It is possible that some states may want assurances that existing revenues will be protected when they implement GST. The Commission is willing to consider providing for compensation in order to advance the implementation of a ?flawless? GST.?