The Hindu Business Line : Crystal-gazing the GST

Budget 2006 outlined a roadmap to implement a national Goods and Service Tax (GST) by 2010. In its report, the Kelkar Committee had mooted a new legislation called the Indian Goods and Services Act to replace both the Central Excise Act, and the service tax levied under the Finance Act, 1994. The new legislation would provide a well-defined negative list of goods and services for exclusion from the tax net. Thereby, the present dispensation of selecting a few services within a service for exemption/abatement/rebate would not hold water. It seems inappropriate that this trend is still continuing.

Budget 2006 removed the exemptions given to a few services rendered by chartered accountants, cost accountants and company secretaries.

This resulted in a bit of a euphoria being created by the bodies that man these professionals.

One would have expected the Government to remain steadfast in its decision but Notification No 25/2006 of July 13, 2006, gave the game away by exempting "representing the client before any statutory authority in the course of proceedings initiated under any law for the time being in force, by way of issue of notice" from the rigours of service tax.

Representation without notice

The immediate question that arises is whether representation without a notice from the statutory authority would amount to a taxable service.

The logical answer would be yes considering the fact that a specific mention of the notice has been made in the exemption circular.

These are the sort of interpretational issues that could arise when one attempts to pick and choose a few services within a broad category of services for exemption. Fresh abatements have also been given to leasing companies in the Budget.

At present, the effective value-added tax at the level of the States is around 17 per cent (inclusive of the excise duty on manufactured goods and the Central Sales Tax, while the excise duty is 16 per cent.

Hence, the combined tax at the Centre and the States is 33 per cent. This has to be brought down to 20 per cent, which could entail a huge revenue loss for the Government.

The proposed model for GST is not likely to be based on the recommendations made by the Kelkar Committee and the tax committee for the Tenth Plan, thereby meaning that we could have GST rates in excess of 20 per cent.

This could result in a gradual jacking up of the rate of service tax over the next few years in order that nobody gets a stiff dose when the GST happens at 20 per cent. Other sources of revenue to the Government are diminishing making a rate increase the only way out.

The Government needs to do much more in the next few years to enable a full-blown version of GST to come out in the appointed year. They could make a beginning by making out a negative list for services and manufacture apart from which everything else would be taxable.

Exemptions and abatements need to be done away with once the negative list comes into play. The teething troubles we had while implementing VAT should be a lesson for the Government.

Else, we could end up with a hastily drafted GST Act, which one could avoid.

(The author is a Hyderabad-based chartered accountant.)