Preparation for GST neglected in Budget

In this Budget the Finance Minister has done very well in making it clear that GST will be introduced in April next year. He has also announced that one of the major objectives of this Budget is to move forward on the road to GST. Since GST is basically a combination of Central Excise and Service Tax at the Central level, his initiatives were expected in respect of these two taxes. If we examine what exactly he has done in this respect we find that all he has done is that he has raised the general rate of 8 per cent of Central Excise duty to 10 per cent to make it equal to the rate of service tax. He has claimed that this has been done to combine the two rates for the purpose of GST. However, this is hardly any positive measure towards GST.

Just making excise and service tax rate 10 per cent one can hardly constitute any serious move towards GST. One really does not know what the Central GST rate will be in April 2010. States also will charge State GST on the same base as that of CGST. So the States will have a big say in fixing the rate. It has also to be a revenue neutral rate (RNR) which therefore will involve a lot of arithmetical exercise involving all the taxes which will be subsumed in the GST. It is most uncertain what it will be. Just making two rates equal is no important advancement towards the goal. It will, however, make Cenvat credit simpler and to that extent it is welcome.

Secondly 8 per cent is not the only rate in Central Excise, though the most predominant rate. There are several rates like 2, 4, 8, 12, 24, 37.5, 42 and many specific rates which should have been made to converge towards 8 per cent to a substantial extent in this Budget. The specific rates should have been advaloremised.

Thirdly the tariff should have been simplified now for smooth subsumation into GST. There are nearly 283 exemptions, with 9 lists and 54 conditions in the main notification. There are many more others. While removing all exemptions would be difficult at this stage, standardisation could certainly be done by sticking to two rates like 10 and 5 (apart from nil). On the other hand so many exemptions have been added in this Budget.

Fourthly, area-specific exemptions have become much less profitable after the rates of duty have come down. Income tax benefit is the major consideration now. For making a smooth GST the area-specific exemptions are a great hindrance. A sunset clause could be introduced to end these exemptions, when the GST comes.

Fifthly, in this Budget the Cenvat procedure for greater interchangeability of input tax credit on excise and service tax could be introduced. Distinction between capital goods and inputs could be abolished. Reference to manufacture could be replaced in favour of ‘use’.

Last, but not the least, this Budget has missed an opportunity for introducing comprehensive service tax which would have given the tax payers and the tax collectors an advance opportunity to get settled with the new concept of having all services as taxable except those in the banned list. The Finance Minister said in the Budget the following: “I had another option — to bring all services under service tax. I am not opting for this either at this stage.” I wish the Finance Minister had explained what he meant by "at this stage". The fact is that this was the most appropriate stage to bring in the comprehensive service tax.

The reason is that the GST is one year away. When all taxes are subsumed together and suddenly all the taxable events change, exemptions vanish and the concept of manufacture also evaporates, a whole lot of new concepts will bring in a tremendous splurge of unknown circumstances. If the comprehensive service tax was introduced now, all the stake holders would have got used to it in the next one year. This would have been a great preparation time for GST. We had missed it now.

E-mail: smukher2000@yahoo.com