PwC Analysis: Indirect Tax

Taking a decisive step forward in the process of indirect tax reforms in India, the finance minister, in Budget 2006, had proposed the introduction of a national-level goods and services tax (GST) by April 1, 2010. Two years hence, the finance minister, while presenting Budget 2008, has expressed satisfaction with the progress made in preparing the road map for introduction of the GST and has reinforced the above target date. However, the road map is not, as yet, known and it is hoped that this will be made public sooner rather than later.

The Empowered Committee of State Finance Ministers (EC), which had been entrusted with the task of framing a model for the GST as well as setting out a specific road map for its introduction had, in consultation with the central government, constituted a joint working group (JWG) in May 2007 to recommend the model of the GST. Within seven months of its constitution, the JWG presented its report on the GST to the EC in November 2007, recommending a dual GST model for India. The EC has accepted the recommendations of the JWG and is now giving final touches to its recommendations.

The process for phaseout of the central sales tax (CST), which forms part of the GST initiative, has been continued and a further reduction of 1 per cent has been proposed with effect from April 1, 2008, so as to complete the phaseout by April 2010.

Impact Analysis
The reiteration of the April 1, 2010, deadline for introduction of GST is a welcome measure and affirms the central government's commitment in this regard. If Budget 2008 were to be analysed for a pointer towards the appropriate rate of the goods tax under the GST regime, the reduction in the Cenvat rate from 16 per cent to 14 per cent may signal a possible goods tax rate of 14 per cent under the federal GST. If this be so, this will be a very welcome move as it reduces the aggregate incidence of the GST on goods. On a short-term basis as well, the reduction in the Cenvat rate will act as a major stimulus for reviving consumption-led demand for a range of goods, across sectors. Similarly, the service tax rate, which remains unchanged at 12 per cent, is a pointer to the possible service tax rate under the GST dispensation. Although harmonisation between goods and services tax rates is desirable, the information emanating from the empowered committee has suggested that there could be a distinction in the federal GST rate on goods and that on services.

The phaseout of CST is imperative for a successful implementation of GST. In line with expectations, Budget 2008 has proposed a further cut of 1 per cent in the CST rate from April 1, 2008. Allaying the apprehensions of states over the likely revenue loss on account of the aforesaid reduction, the government has indicated that the rate shall be notified after a consensus is reached between the Centre and sates on the measures to compensate states for revenue losses, if any. One of the measures to compensate states is to allow them to tax certain services, the list of which is yet to be specified. It has also been indicated that a sum of Rs 2,500 crore will be earmarked for this.

On the model itself, although the EC is yet to announce the details, it has been indicated that GST will have two components "" federal GST and state GST. Further, the two will, in themselves, comprise goods tax and services tax. It has also been indicated that both will comprise multiple rates for goods and a single rate for services. Full input tax credits would be available in regard to the federal GST and the state GST, which will apparently operate in parallel.

There is much debate on the likely aggregate rate of GST and there appears to be a consensus that it may approximate 20 per cent which, in comparison to international GST rates, is high, but is a significant reduction from the present cumulative incidence of excise duty and state VAT of around 25 per cent. Apart from the reduction in rate, an additional benefit would be that the base on which federal and state GSTs would be charged would be uniform and this would ensure that there is no cascading, that is, there is no tax on tax.

There are several aspects of the GST model that are yet to be clarified by the EC and these will have to be addressed in due course. However, it is not in doubt that the government is committed to GST and will accelerate the movement towards GST in the coming months, if the announcements in Budget 2008 are any indication.