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Thursday, September 17, 2009

PLAN FOR SINGLE RATE GST SUFFERRED SETBACK

16.9.2009

The efforts to stitch togethr a common market in India through the introduction of a single goods and services tax (GST) by 1 April suffered a serious jolt on 16.9.2009, after 35 states and Union territories agreed on three rates for transactions of goods.

In a move that has more to do with politics than economics, the states proposed a lower GST rate for items of mass consumption, a regular rate for other goods and a nominal charge of 1% on precious metals. There will also be a small list of goods exempted from this tax.

Announcing this, West Bengal finance minister (FM) Asim Dasgupta added that the agreement between state governments did not cover services.

A single GST was to replace a tangled web of national, state and local taxes and would have been the culmination of a long process of indirect tax reforms that began in 1991. GST in its pristine form was expected to help firms produce more efficiently and give consumers more clarity about the taxes they paid on goods and services.

The new tax structure proposed on Wednesday is similar to the value-added taxes (VAT) that states currently impose, though GST was envisaged as an improvement over the current system.

The states want multiple rates to stem revenue losses as well to hold the price line of some goods.

Dasgupta, chairman of the empowered committee of state finance ministers, the group that has to chart out the roadmap for GST, declined to disclose the rates for different categories of goods. However, FMs who participated in Wednesday's meeting said the normal rate was likely to be around 5% and the standard rate could be anything between 8% and 12.5%.

Besides the states, the Union government too will charge its GST rate, which was earlier expected to be 8%.

In the past few months, negotiations among states have run into difficulties as richer states such as Maharashtra did not always have the same interests as poorer ones such as Madhya Pradesh or Sikkim.

According to a state FM, Wednesday's compromises reflected Dasgupta's aim to narrow the differences and get GST off the ground. Subsequently, GST could be reformed to achieve the original objective, the minister added.

"We don't have any time to lose," Dasgupta told the media, after announcing that bureaucrats from the Centre and states would assemble into working groups to prepare a framework for constitutional amendments and a "model GST legislation".

There is no process yet for working out operational details," said Satya Poddar, partner at audit and consultancy firm Ernst and Young.

A negative implication of Wednesday's decision by the empowered committee is that it may become difficult to counter litigation arising out of disputes on categorization of goods and services, he said.

Currently, some of the outstanding disputes are on prepaid mobile phone cards and packaged software where the tax department and firms differ on categorization, which attracts different tax rates. In "value-added services" such as these, a single GST would have removed the root cause of disputes, Poddar said.

With states asking for three rates, "the best thing to do (would be) to have items at standard rates, which can be blended into services", he said.

Now, states are open to charging 8% as a uniform tax rate for services. If the Union government adds the same rate on services, they will be taxed at 16%, compared with the current level of 10%.

Today, service tax is levied exclusively by the Union government, but a part of the proceeds is shared with states according to the formula fixed by the Twelfth Finance Commission.

Identifying the items of mass consumption that would attract the "lower rate" is expected to be tricky, as each state has unique needs.

For instance, Madhya Pradesh FM Raghavji (who goes by one name) pointed out in the meeting that the state has kept cereals, pulses and sugar out of the VAT net "despite incurring substantial revenue loss to give relief to the poor".

A written copy of Raghavji's speech pointed out the proceedings of the empowered committee have given an impression that foodgrain would be taxed under GST.

After the meeting, Dasgupta said foodgrain were discussed, but there is no consensus on its categorization as yet.

To mitigate fears of some states that they would be steamrolled into accepting categorizations that would harm their interests, Dasgupta said states would be allowed to choose goods of local importance, which could be kept out of GST.


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New Delhi:31 aUG 2009:

To sell the concept of goods and services tax (GST) to the electorate, some states are pushing for two tax rates: a low one for items of mass consumption and a higher rate for the others.

While it could complicate the structure by allowing for more sets of tax rates, politicians believe it will be easier to implement and push through their respective constituencies. The Union government and states are negotiating the contours of a GST that the Congress-led United Progressive Alliance is committed to launching by 1 April.

GST is an attempt to economically integrate all the states. Currently, states have the power to independently levy indirect taxes on some goods. As a result, some of the decisions made by companies have more to do with tax avoidance than operating efficiency, say analysts. Under GST, there will be uniform tax rates on almost all important goods and services across states.

Negotiations among states on the two rates are expected to start at 5% on items of mass consumption, to be levied separately by the Centre and states. Similarly, states are expected to discuss a rate of 10% levied independently by the Centre and states for the residual items.

Before some states floated the idea of segregating consumables and charging different rates, many states were veering towards a GST rate of 16%, with 8% levied separately by the Centre and states.

The finance minister of a Bharatiya Janata Party (BJP)-ruled state, who did not want to be identified, told Mint recently that some of the ministers had an ideological problem with a single GST rate on all consumables. How does a politician convince a voter that a bicycle and car would be taxed at the same rate, the minister wondered.

At the other end of the ideological spectrum, T.M. Thomas Isaac, finance minister of Kerala’s Left Democratic Front government, which is made up of different Communist parties, said he would like a lower GST rate on items of mass consumption.

This would, however, require a uniform rate across the country. For manufacturers and service providers, the biggest advantage of GST would be the right to offset state taxes paid on inputs sourced from another state. Therefore, the items of mass consumption chosen to be taxed at a lower rate would have to be uniform across states for companies to offset state taxes on inputs sourced from different parts of the country.

Negotiations on a uniform list of items of mass consumption are likely to be tough.

The recent twist in the GST negotiations did not come as a surprise. “The more you get into details, you realize it is a mammoth task, even conceptually,” said Vivek Mishra, who deals with the subject of indirect taxes at consultancy Ernst and Young. Mishra said the recent developments were just the beginning. “It is the latest example of how difficult or how long the haul is going to be. This (two rates) is a significant departure, but it is only the first of the many we will see,” Mishra added.

The state finance ministers have been negotiating the GST blueprint under an umbrella group dubbed empowered committee of state finance ministers, which meets at regular intervals. Representatives of the Central government also take part in the meetings.

Currently, the empowered committee is working on a deadline of 1 April, but since June, there have been signs that it might not be easy to make this transition.

Based on reactions from finance ministers of different states and officials in both state and Central bureaucracies after recent meetings of the empowered committee, differences seem to have arisen on account of a conflict of interest among states and the risk of making the transition without a robust nationwide information technology (IT) network.

Soon after transitioning to GST, some of the economically weaker states might see a dip in revenue as GST is a consumption tax. Therefore, some states such as Assam have asked for open-ended compensation from the Centre till their revenues stabilize as a price for giving up the states’ power to independently change tax rates.

Among economically stronger states, Gujarat has asked for an IT backbone to be in place before transitioning to the GST regime, while Tamil Nadu’s representatives have said the April deadline is premature.

India had an opportunity to implement a tax code that would limit market distortions, be transparent, and keep compliance costs low. But that opportunity may now be lost.
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A uniform, single-rate GST was the opportunity for Indian companies to move beyond the complexities of disparate tax regimes; and the economy would have been unified under a single Indian market, with limited distortions.

The major issue is that different tiers of tax rates create a host of market distortions. This problem stems from the complexities associated with classifying goods. What will be classified as a mass consumption good, and what will be taxed at a normal rate?

If similar, and competing goods are set at different rates, that will create market inefficiencies. Consumers may be inclined to substitute to the product that is cheaper—after taxes.

And these distortions from classification will exist in other realms as well. Composite goods—or a bundle of different goods—will be difficult to parse across different tax rates. For example, how will a mobile phone with a camera be taxed? As a camera, a phone, or as a different category altogether?

The point of a GST was to give Indian firms respite from the distortions and complexities of India’s tax regime—and the complicated webs of tax codes, which are vastly disparate across states and regions. Not only could GST have simplified compliance costs, but it would have also limited the market distortions caused by taxes.

Different states had different stakes in GST because of their levels of consumption, and because of the perceived fear that essential goods would become costlier under a GST regime. What is most troubling about the GST plan is that states will be given free rein to exempt goods—that they perceive of local importance—from GST, some of which are major tax revenue generators.

It remains to be seen what GST for services will look like. But hopefully, GST reforms can be reconsidered in the near future so that the imperative of a unified market in India can actually be realized.
--------------------------------------------------------------------------------- Sep 17 05:34 AM
The states today decided to have two rates for the proposed Goods and Services Tax — one standard rate and another a lower rate for essential items — scheduled to be introduced from April 1, 2010. "We have reached a consensus so far as states' GST is concerned. There will be two rates, one standard rate and the other a lower rate for essential items," Value Added Tax Panel (VAT) chairman Asim Dasgupta told reporters after an empowered group of state finance ministers and officials of the union finance ministry met here.

He said there would be a list of exempted items and a special GST rate for precious metals. However, there is no clarity on whether the centre would also have two GST rates. Dasgupta said he cannot speak on behalf of the central government but it would likely have a "good deal of conformity" with state-level GST. Consensus is already there on having a dual model of GST — separate GST for the centre and the states. GST proposes to create a common market and replace excise duty and service tax at the centre and VAT and local taxes at the states' level.

Another important decision taken at today's meeting was forming a joint working group comprising officials of the finance and other concerned ministries at the centre and finance secretaries or commissioners of commercial taxes at the state level to decide on a framework for the constitutional amendment and model legislation on GST for the centre and states in a time-bound manner. Dasgupta said the joint working group would submit a report in about two months. "We think we do not have any time to lose. Therefore, the framework for a constitutional amendment is necessary as soon as possible, in a time-bound manner," he said.

However, while Dasgupta exuded confidence and commitment for introducing GST as slated, various states including Madhya Pradesh expressed reservations over it, saying it should not be introduced in haste.

ENS Economic Bureau

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