August 6, 2010 / 1:44 PM / 8 years ago

Q+A: India's proposed goods and services tax

NEW DELHI (Reuters) - Plans by India to introduce a nationwide goods and services tax (GST) from next April may be delayed if any state governments fail to back the government’s proposed rollout timetable.

A nationwide GST is intended to usher in a uniform market for goods and services, cut business costs and boost government revenue. But differences between states and the central government, largely over questions of fiscal autonomy, persist.

Here are some key questions regarding the GST:

HOW WILL THE GST WORK?

The GST is an indirect tax that would replace existing levies such as excise duty, service tax and value-added tax (VAT).

The states and the central government will impose the tax on almost all goods and services produced in India or imported. Exports will not attract GST.

Producers will receive credits for tax paid earlier, which will eliminate multiple taxation on the same product or service.

Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected.

WHAT‘S THE RATIONALE?

Eliminating a multiplicity of existing indirect taxes will simplify the tax structure, broaden the tax base, and create a common market across states and centrally administered districts.

At the same time, GST will lower the average tax burden for companies that now pay “cascading” taxes on top of taxes through the production process. Reducing production costs will make exporters more competitive.

WHAT ARE THE PROPOSED RATES?

In the first year, the government proposes two rates -- 12 percent for essential items and 20 percent for others. In the second year, the higher rate would be lowered to 18 percent, with the goal that both rates converge at 16 percent, split equally between the central government and the states.

ARE ANY EXEMPTIONS PROPOSED?

Yes. The government will review various lists of exempted goods to align them at centre and state levels.

Asim Dasgupta, chairman of the panel of state finance ministers, said alcohol, petroleum and electricity would not come under GST. All three are revenue spinners for most states.

WILL THE STATES LOSE OUT?

New Delhi will compensate states for potential lost revenue and Finance Minister Pranab Mukherjee has assured states that if needed, he would sweeten a 500-billion rupee ($10.8 billion) fund that a government panel has proposed as an incentive for the states to buy into GST.

WHAT HAPPENS NEXT?

The legislation to make constitutional amendments needs to be finalised and the administrative mechanism must be created. The amendment is a prerequisite, as GST will give both the central and state governments additional powers of taxation.

WHAT IS THE STATUS OF THE AMENDMENT?

The draft amendment has been circulated by the central government but has met with objections from some states fearing loss of fiscal autonomy.

Those states are opposed to a clause in the amendment giving effective veto power to the federal finance minister even on taxation matters that relate to state governments.

Some states, including Gujarat and Madhya Pradesh, also oppose the basic structure of the taxation system. Instead of the fixed structure proposed by the central government, these states want a floor rate of GST to be prescribed, beyond which the states should be free to charge their own rates.

WILL THE ROLLOUT BE DELAYED?

GST has already been delayed once from a targeted April 2010 launch.

The latest objections could result in another delay, though New Delhi maintains the new April 1, 2011 deadline can be met.

If the constitutional amendment bill cannot be introduced in the current legislative session, then it can be placed before parliament only in the winter session later this year. It must also be ratified by at least 15 state legislatures -- a potentially lengthy process that could result in a delay.

WHAT IS THE REVENUE IMPACT?

The GST was initially intended to be revenue-neutral but is now expected to increase the tax take thanks to more efficient collection and increased compliance.

WHAT ABOUT THE ECONOMIC IMPACT?

Implementation of a comprehensive GST would lift India’s economy of over $1 trillion by between 0.9 percent and 1.7 percent, on top of whatever growth would otherwise be achieved, according to a report by the New Delhi-based economic think-tank the National Council of Applied Economic Research.

(Reporting by Abhijit Neogy, editing by Malini Menon, John Stonestreet)

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