Bogged Down By Numbers

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The Constitution of India envisages the governance of the country as a federal structure, comprising the Union Government at the Centre, and the state governments in the different Indian states. Under the Constitution, the Central Government is empowered to impose taxes such as service tax, custom duties, CENVAT and Central sales tax and the states themselves are empowered to impose sales tax/value added Tax (VAT) and certain other local taxes such as entry tax and entertainment tax. This multiplicity of taxes has made the indirect tax regime a complex one. This calls for reforms to take place so as to bring about a simplified and integrated system of indirect taxation. The approach to tax reforms, which accelerated in 1991 with the opening of the economy, was to broaden the tax base, moderate the tax rates, integrate several taxes and, finally, prune the tax-related incentives and exemptions. Over the years, there have been efforts to rationalise the customs duty rates, and India has taken significant strides towards reaching its aim of achieving equivalency with the rates in Asean countries. To that end, rates have already been cut to 10 per cent, with an indication that they will be cut further to 5 per cent by 2010. Similarly, there has been rationalisation of tax rates with regard to excise and service taxes as well. Today, more than 95 per cent of product categories are charged a uniform excise duty of 16 per cent. Thankfully, there has been only one service tax rate since its inception in 1994, and the effort had been to progressively enhance the rate in order to narrow the gap between the excise tax rate of 16 per cent and the service tax rate. However, there continues to be a differential of 4 per cent between these two taxes as yet. It is likely that this differential would be further narrowed down through an enhancement in the service tax rate or there could be a harmonisation of the excise and the service tax rate at 14 per cent. Apart from rationalisation of rates, there have been efforts to integrate taxes. A step in this direction has been taken with the integration of credits across goods and services in the year 2004. This has helped in facilitating the progression towards a pure VAT. VAT has replaced the state sales taxes with effect from 1 April 2005 in a majority of the states, followed by its introduction in the remaining states during the period from April 2006 to January 2008. Currently, all Indian states and Union territories operate under VAT. With the Finance Minister reiterating in Budget 2007 the introduction of a Goods and Services Tax (GST) with effect from April 2010, there is renewed optimism that the most important piece of India's tax reform initiative, i.e. the replacement of the multiplicity of indirect taxes with a single GST, is on course. Further, in terms of the announcements of the Empowered Committee (EC) of the state finance ministers over the past couple of months, it is very likely that India will implement a dual GST with effect from the above date. Based on the available information, there will be two parts to the GST and will comprise the federal GST and the state GST. The federal and the state GST will, in themselves, be comprised of the goods tax and the services tax. There is much debate on the likely aggregate rate of the GST and there appears to be a consensus that it may be approximately 20 per cent, which is a significant reduction from the present cumulative incidence of the excise duty and the state VAT of around 25 per cent. The additional benefit is that the base on which federal and the state GST will be charged will be uniform and this will ensure that there is no cascading, that is, there is no tax on tax. There are several aspects of the model that are yet to be clarified by the EC, which will be addressed in due course of time. However, there is no doubt that GST is coming and India is in the last and, perhaps, the most important phase of indirect tax reforms. The author is Leader of Indirect Tax Practice at PricewaterhouseCoopers Businessworld Issue 25 Feb-3 Mar 2008