The finance ministry has rejected the two-rate goods and services tax (GST) structure proposed by the states, adding further doubts to the April 2010 deadline for the roll-out of a unified indirect tax system for Indian states.
In its first formal response to the discussion paper on GST by the empowered group of state finance ministers, the department of revenue has instead recommended that there should be a single rate of GST for both goods and services because a dual rate may lead to inversions in the duty structure.
The empowered group, headed by West Bengal Finance Minister Asim Dasgupta, had suggested a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. It had also recommended a special rate for precious metals and a list of exempted items.
The Centre’s stand on a single rate is in line with the views of the Thirteenth Finance Commission’s task force on GST, which had proposed a single GST rate of five per cent for the Centre and seven per cent for states, except for five specific categories, in its report released last month. The finance ministry’s response to the Centre, however, has not suggested any revenue neutral-rate for GST in its comments.
If the finance ministry sticks to its stance on a single-rate GST structure, the likelihood of the new indirect taxes regime rolling out by April 2010 is completely ruled out. Official sources admitted that the states are likely to oppose the single-rate structure and this would further delay the implementation of the new GST system.
The Centre is concerned that adopting a dual rate for goods would give rise to a similar demand for services as well, and also this would not eliminate the existing distinction between goods and services. It said this would result in input credit accumulation and demand for refunds.
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Against the demand of the states, the government said electricity duty, octroi, purchase tax and local taxes should be subsumed under GST. It also suggested GST be levied on petroleum products and alcohol.
On the list of items to be exempted from GST, Centre said around 99 items at present exempted under VAT or value-added tax may be kept out of GST for initial years and the states should not expand the list.
The Union government has disagreed with the states on the issue of maintaining different thresholds for both the Centre and the states. The empowered group, in the discussion paper released in November 2008, had recommended a uniform GST threshold of Rs 10 lakh across all the states. However, for Centre, it had suggested a threshold of Rs 1.5 crore for goods and “appropriately higher” for services.
“There should be a uniform threshold. This annual turnover threshold could be Rs 10 lakh or even more than that. The Centre may also have a composition scheme up to gross turnover limit of Rs 50 lakh, if the threshold for registration is kept at Rs 10 lakh,” the government said.
The Finance Commission taskforce had also suggested small dealers, service providers and manufactures with an annual turnover of less than Rs 10 lakh should be exempted from both Central GST and State GST.
The report had not gone down well with the empowered committee, with the states questioning the methodology used by the committee to arrive at a revenue-neutral rate for the proposed indirect tax.
Pratik Jain, executive director, KPMG, said, "What the Centre is saying is desirable, but we have to see whether it is possible to implement it on the ground. In the short-term we may have multiple rates. However, over a period of time we should move towards a uniform tax rate with a broader base."
Jain said the empowered group should not have a problem with a common threshold and a consensus is likely on this. He added purchase tax and octroi should be subsumed under GST because keeping this out of GST would lead to distortions.