A STEP CLOSER TO GOODS AND SERVICE TAX

The central and state governments moved closer to ushering in a nationwide goods and services tax on April 1, 2011, that will simplify the manner in which corporates, small enterprises and traders will be levied taxes on goods and services.

The reform would eliminate multiple indirect taxes levied by states and the central government, that will not only make life easier for most manufacturing companies but also allow products and services to be priced uniformly across the country. On Wednesday, federal and state finance ministers emerged from a meeting saying they had narrowed differences that have delayed implementation. States are worried over loss of revenue and are negotiating how they will be compensated.

Finance minister Pranab Mukherjee has proposed a three-year timeline to fully implement the GST. In the first year, there will be a dual-rate GST. The Central GST is proposed at 6% for essential commodities and a 10% standard rate for other goods. States are expected to impose similar levies. As a result, the combined GST on goods will be between 12% and 20%. The tax on services will be levied at 8% by the Centre and a similar levy by the states.

In the second year, only the standard rate will be reduced to 9%, the others remaining constant. In the third year, all the rates will be brought to a level of 16% for both Centre and states put together.

The successful implementation of the goods and service tax (GST) can give a trillion-dollar boost to the economy, taking the total output to $2 trillion in a short span of time.

The gain from GST will propel the country from one-trillion dollar economy to two trillion-dollar economy in a short span of time. "Well designed GST will see an increase of 2 to 2.5 per cent in the GDP."

The government will  also float a special purpose vehicle (SPV) for setting up information technology (IT) infrastructure for the proposed Goods and Services Tax (GST). The SPV, called GST N (Network), will have the Union government, the states and a technology partner as its stakeholders.

In a presentation given to the empowered committee of state finance ministers today, Unique Identification Authority of India (UIDAI) Chairman Nandan Nilekani assured that IT infrastructure for GST would be ready in the next six months, that is, by February 2011 - two months ahead of the proposed introduction of GST.

The SPV will be formed by August 10 and by December 1 it will start testing of a tax platform interface with taxpayer software. By January 1, 2011, it will start testing the Centres system with that of states. By February 1, it will be prepared with facilitation centres for businesses which do not have computers. The SPV will also provide assistance to states which do not have required IT infrastructure for the GST rollout.

The legislation to make constitutional amendments needs to be finalised and the mechanism for administering the tax needs to be created. There is a hope that the legislation will be introduced in parliament in the session that begins on July 26.

Pranab Mukherjee has set a deadline of August 20 for states to give their final consent on the new duty structure and all other pending issues, including the proposed constitutional amendment. This is to enable him to move the GST Bill in the monsoon session of Parliament. The empowered group of state FMs has decided to meet on August 4 in the Capital to thrash out all pending issues.