GST still hinges on dual rate structure

The hugely awaited Goods and Services Tax (GST), which has missed several deadlines for implementation due to resistance from states, now appears to have hit another roadblock, which is the keenness of states to go in for dual rate structure on which the Centre is not comfortable.

Experts watching the development closely said at the moment the GST design is not quite clear and it may take another year to become a reality.

“The problems now have reappeared in the rate structure. The Empowered Committee of state finance ministers is pressing for two rate structure in the lines of European Union,” Foundation for Public Economics and Policy Research Director Mahesh C Purohit told Deccan Herald.

Persons close to the developments in the Empowered Committee also said that the Chairman of the Empowered Group of Finance Ministers, Shushil Kumar Modi too is very keen on two rate structure under GST.

Under a dual GST, it is proposed that a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services.

The Ministry of Finance has, however,  advocated a single rate of CGST & SGST across goods and services, as against a dual-rate GST proposed by the EC. According to the sources in the Finance Ministry, a two rate structure for goods would pose problems such as likelihood of inversions in duty structure, input credit accumulation, increase in refund claims, higher general rate of tax, demand for lower rate on services and continuation of the endemic distinction between goods and services, thus making the GST structure more complex.

States, on the other hand, are saying that dual GST is expected to reduce the number of taxes at the Central and State level, remove current cascading effects of taxes and reduce transaction costs of the taxpayers through simplified tax compliance. States are of the view that it will also increase tax collections due to a wider tax base and better compliance.

Many countries in the world have a single unified GST system or a single tax applicable throughout the country. However, in federal countries like Brazil and Canada, a dual GST system is prevalent, whereby, GST is levied by both the federal and state or provincial governments.

According to Purohit, the GST may take another year, because any type of convergence between the Centre and states looks far fetched now.

The Bill on GST, which is expected to cut business costs and boost government tax revenue, was introduced in Parliament in March last year. But, it needs the approval of two-thirds of parliament and half of 28 states to become a law.

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