GST rate may be fixed at 16%

The long-awaited reform of India’s indirect taxes system is set to get a fillip , with a broad consensus forming within the finance ministry on a rate of 16% for the proposed Goods and Services Tax (GST) for both Centre and states combined. To be levied on all companies and traders with annual turnover of Rs 10 lakh and above, this would provide a tax base of 40-45 lakh assessees and ensure that neither the Centre nor states suffer any revenue loss.

Sources said rates for both the Centre and states on GST could be 8% each. The states could get a percentage point more depending on the Centre’s talks with the empowered committee of state finance ministers after the Union Budget. However, there is no scope for taking the Central threshold limit of annualturnover to Rs 1.5 crore as demanded by states.

GST will streamline movement of goods with a single tax structure replacing the current multiple taxes. Today, if a soap is manufactured for Rs 100, 8% excise duty is imposed on its cost, 12.5% VAT on the net sum when it is cleared from the factory and 2% central sales tax when it is supplied inter-state . Entry and purchase taxes are also charged — taking the price to Rs 130-150 , said Anita Rastogi of PricewaterhouseCoopers. In GST, a uniform rate will be imposed only once, at the point of supply. This should reducecost for consumers.

The law ministry is believed to have sent a detailed response on the suggestions sought by the department of revenue towards finalisation of draft Constitutional amendment of the indirect tax reforms.

The proposed GST was initially scheduled to be implemented from April 1, 2010. However, lack of consensus between states and the Centre on a uniform tax structure and their inability to carry out necessary legislative amendments led to its postponement by another six months.

“On a different threshold, the revenue-neutral rate for central GST will go abnormally high,” sources said. The Centre is hopeful of taking on board Haryana and Punjab on including the purchase tax in the GST. At present both the states earn nearly Rs 1,000 crore each on account of purchase tax and have been seeking exclusion of the tax from theproposed GST model.

Sumit Dutt Majumder, member Central Board of Excise and Customs, who has an overview of the tax base on Central excise, said central excise and state VAT would still have to be levied on ‘sin goods’ like tobacco and alcohol, which are taxed much higher than other products. While tobacco is taxed by the Centre, alcohol comes under states. In the current negotiations, states have sought petroleum products and alcohol to remain outsisde the GST model.

However, the Centre wants to bring them within the GST model in order to remove the cascading effect on the proposed tax paid on inputs such as raw material and packaging material. Sales tax/VAT and state excise duty can be charged over and above GST.

The Centre also has plans to continue with some of the exemptions toward working out an ideal and faultless GST. Currently there are 330 exemptions in the CENVAT and 99 extended by states in their VAT list. After a careful screening , the Centre and states could work out a uniform exemption list that could be pruned down to 50, sources said.