Major change in law needed for GST: Shome

Parthasarathi Shome, the finance minister's adviser, today hinted that a constitutional amendment may be required before the unified goods and service tax (GST) is introduced.

Finance Minister P Chidambaram had proposed in the last Budget that GST should be implemented from financial year 2009-10.

Shome, who was speaking at the release of a study on GST by industry body Assocham here, pointed out that no specific provision for levying service tax existed earlier and it was only through constitutional amendments that the Centre had been empowered to tax services, or pass on power to states to tax certain services.

"Constitutional provisions, at the moment, do not include services as a clear category. As far as goods are concerned, they are under the Centre's ambit up to the manufacturing level, while distribution and sales is a state subject. Are we going to work with GST within the existing constitutional provisions? The finance ministry will be conceptualising this in consultation with state finance ministers," he said.

Shome felt the tax rate should not be so high as to impact productivity but had to be high enough to replace the current level of revenue receipts. On its part, Assocham has recommended a 15 to 17 per cent rate for GST.

The Assocham report on GST has suggested three roadmaps for the tax, with the preferred model in the first phase being one in which the common GST base is split for taxation purposes by the Centre and states.

The GST would eliminate the cascading effect of taxes that raised the costs of firms by 15-20 per cent and distorted prices of goods, it said.

"Removal of price distortions will have a dynamic impact on revenue and growth," Shome said.