Govt proposes 20% GST on goods, 16% on services

Govt proposes 20% GST on goods, 16% on services

Finance Minister Pranab Mukherjee on Wednesday proposed a three-rate structure for the Goods and Services Tax - which will simplify the indirect tax regime.

Under this goods will attract 20 percent levy, services 16 percent and essential items a concessional 12 percent.

Mukherjee proposed these rates to the state finance ministers at a meeting in New Delhi on Wednesday to evolve consensus over GST that is planned to be implemented from 1st April, next year.

"GST, a landmark reform of indirect taxes, is well within our reach. It is now for us to convert it into reality," Mukherjee stated.

All central and state taxes like excise, VAT and service tax will be rolled into GST, once the new regime comes into effect.

The revenue from GST will be shared equally between the centre and states, implying that out of 20 percent tax proposed for goods, 10 percent each would go to the centre and the state concerned.

Similarly, in case of services, the revenues would be equally shared between the centre and the state.

Besides the maximum rate of 20 percent, Mukherjee has also proposed a lower rate of 12 percent for essential items.

This too will be shared euqally between the centre and states at 6 percent each.

While elaborating on the dual rate structure for goods, Mukherjee said, "The peak effective rate will be about 15 percent which will be quite acceptable to the trade and industry."

The Minister assured the states that the Centre would "step up the amount of compensation recommended by 13th Finance Commission should the need arise, based on a mutually agreed formula."

The Commission, which advises on revenue sharing between the Centre and states, had asked the union government to set aside Rs 50,000 crore to compensate states for the possible revenue loss incurred on account of implementation of GST.

He also proposed the constitution of an empowered group chaired by Nandan Nilekani, chairman of the Unique Identification Authority of India (UIDAI), with joint representation from the Centre and the states to choose the appropriate technology for GST implementation.

Mukherjee said the Centre has decided to review the existing exemptions from Central excise duty so that the list of goods exempt from CGST (central GST) is aligned to the SGST (state GST) list, and the 99 items currently exempt from VAT are taken off both the components of GST.

Currently, the value added tax (VAT) on a bulk of the items in different states ranges between 8 percent and 20 percent, and both the Central excise and service tax attract a rate of 10 percent.

Elaborating on the GST proposal, he said the effort should be to make the transition to GST "smooth and painless" and thus proposed to adopt a single rate structure with unification of the rate for goods and services in a phased manner over three years.

In the second year of implementation depending upon the revenue receipt by the Centre and states, the standard rate for CGST and SGST may be reduced to 9 percent, he said.

And, in the third year, the standard rate on goods could be further reduced to 8 percent, while raising the concessional rate on goods to 8 percent from 6 percent, and retaing the rate on services at 8 percent.

"Thus, in a phased manner, we will be able to achieve a single CGST and SGST rate for both goods and services," Mukherjee told the state finance ministers.

On the issue of central sales tax (CST) compensation, he said that the Centre has decided to "fully compensate" the states for their revenue losses on account of CST reduction during 2009-10.

He also assured the states that the compensation for subsuming Purchase Tax on foodgrains in GST will be provided along with VAT compensation for the next four years.

A reference will be made to the 14th Finance Commission to address the issue for the period beyond 2013, he said.

On the issue of exemption threshold under GST, he urged for a consensus on a uniform threshold of Rs 10 lakh for both goods and services under both CGST and SGST.