The Hindu Business Line : `Grand bargain' with States on goods and services tax

AS part of a `grand bargain' proposal, the Kelkar Task Force on Fiscal Responsibility and Budgetary Management Act, 2003 (FRBM) has mooted a dual- goods and services tax (GST) system - Central GST and State GST - that is likely to lead to additional gross tax revenues of two percentage points of gross domestic product (GDP) in 2008-09.

This increase in the tax-GDP ratio, according to the Task Force, is central to the plan proposed in its report for achieving the FRBM targets.

The Task Force has held that the VAT principle should be comprehensively used to tax the consumption of almost all goods and services in the economy and that there is a need for the Centre and the States to come to an agreement on this fundamental issue.

Under the `grand bargain' proposed by the Task Force, the States will have the power to tax all services concurrently with the Centre. States would also have access to GST on imports.

Even though States have been seeking powers to tax services to bolster their revenues, the power to tax services currently rests with the Centre alone.

If the `grand bargain' proposal is implemented, both Central and State Governments would exercise concurrent but independent jurisdiction over common or almost common tax bases extending over all goods and services, and in both cases, going up to the final consumer.

At the same time, the Task Force report requires both the Centre and the States to abide by certain principles.

The first principle relates to the rate structure under the dual-GST, wherein the number of tax rates is proposed to be restricted to three ad-valorem rates, in addition to zero rate. Under this proposal, the Centre would have three rates - 6 per cent (floor), 12 per cent (standard) and 20 per cent (higher) and the States would have three rates - 4 per cent (floor), 8 per cent (standard) and 14 per cent (higher).

The total tax burden on most goods - by Centre and States - would work out to 20 per cent.

The standard central rate of 12 per cent, as proposed in the report, is lower the current Cenvat rate of 16 per cent. This, says the Task Force report, is possible in revenue-neutral way owing to the broadening of tax base.

As part of the second principle, the Kelkar Task Force wants the Centre and the States to agree on a commonality of exemption lists and threshold limits, and common lists for the levy of excise on goods with negative externalities such as petroleum.

Another important principle is that the introduction of the GST at both Central and State level should be accompanied by the withdrawal of all cascading taxes such as Central sales tax, octroi, State-level sales tax, entry tax, stamp duty, telecom licence fee, turnover taxes, tax on consumption of electricity, taxes on transportation of goods and passengers.

Further, the report has held that the treatment of imports and exports should be fully integrated with the proposed dual-GST system, where imports are charged a two-part levy representing the Central GST and State GST.

The Task Force has also underscored the need of a nationwide clearinghouse mechanism to handle calculations and fund transfers to States.

While the Central Excise Act and the taxation of services by the Finance Act 1994 will be subsumed under the central goods and services tax (to be implemented through a legislation that may be named Indian Goods and Services Act, the States will need to simultaneously introduce corresponding legislation for taxation of goods and services which will subsume their existing State level cascading taxes.