STATES DEMAND 20% GST

India moved a step closer to a sales tax structure that promises to unify the country’s markets and reduce transaction costs with the finance ministers of all states on Tuesday proposing a 20% goods and service tax (GST), with a larger share of this going to the states.

The empowered committee of state finance ministers, the group that signs off on tax reforms in India, also protested a Union government move to lower the tax rate on aviation turbine fuel (ATF), which is currently taxed by the states at varying rates.

Analysts and experts say GST is a way to simplify India’s so-called indirect taxes. In talks that have gone on for at least a year, the Centre and the states have agreed on a dual GST model. This dual tax will include Central excise duty, service tax and value-added tax (VAT). It will have two constituents: one that will be charged uniformly across the states and the other by the Union government.

According to a minister who attended the meeting of the empowered committee and who did not want to be identified, there is consensus among states that the overall GST rate should be around 20%, with states getting more than half.

The final decision on the rate is yet to be made, he added.

“Kerala is not willing to accept less than 20% as a total GST tax rate,” said Thomas Issac, finance minister of Kerala, who attended the meeting. A person familiar with preliminary negotiations on the rate said some states and the Centre were open to a 18% GST with the two taking an even share, but only if all prevailing tax exemptions are scrapped.

Currently, manufacturers get a tax benefit if they start factories in some states.

The 20% number will still be a decrease from the current rate. S. Madhavan, executive director at audit and consulting firm PricewaterhouseCoopers, says the average incidence of aggregate indirect tax on goods in India is around 24%.

For consumers, however, the patchwork design makes the actual tax incidence opaque.

And for manufacturers, the complicated division of powers between the Centre and states sometimes results in them being taxed twice during the production process, raising the eventual price paid by consumers.

The varying tax incidence also makes uniform pricing of goods difficult.

The ministers also discussed the possibility of the Union government amending the Central Sales Tax Act to unilaterally lower the tax rate on ATF in order to help India’s beleaguered loss-making airlines.



sanjeev.s@livemint.com P.R. Sanjai and Teena Jain contributed to this story.