Tax on services may go up under GST

The GST, a major tax reform move that seeks to integrate the existing Central Excise and Service Tax and Value Added Tax and various other taxes imposed by the states, is proposed to be introduced in a phased manner over a period of three years from April 1, 2010.

Now, the Service Tax rate is 10 per cent, without accounting for the surcharges and cess. But this could move up to 16 per cent as GST on services from April 1, 2011, if Mukherjee’s proposals are endorsed by the states. 

Final say
Chances of the endorsement are high as an Empowered Committee of state finance ministers had left a final decision on the GST rates to the Centre at its meeting in May. Besides, most of the revenue-starved state governments stand to gain from the higher GST tax rate proposed by Mukherjee. The Union Finance Minister was addressing the empowered committee to quickly finalise the GST regime for implementation from April 1.

Mukherjee proposed a dual rate of GST for goods in the first year –– a lower rate of 12 per cent for essential commodities and a standard rate 20 per cent for others. Like the GST on services, the dual GST on goods too entails a 50:50 CGST and SGST sharing.
Since the objective is to eventually arrive at a single GST rate for both goods and services for states and Centre, in the second year of transition, the dual rates of GST on goods will change a bit.

The standard rate will come down from 20 per cent to 18 per cent while the lower rate will remain 12 per cent.

The third year will achieve standardisation of the GST rate to 16 per cent for both goods and services, Mukherjee proposed. This will happen, according to the minister, by reducing the standard GST rate for goods further to 16 per cent while increasing the lower rate from 12 to 16 per cent.

The GST for services remains static at 16 per cent, thus effecting a single GST for goods and services for both Centre (CGST) and states (SGSP) at 16 per cent.This phased transition would make the entire exercise “smooth and painless both for the taxpayer and the administration”, Mukherjee said.

To win over the states quickly, Mukherjee reassured that the Centre would compensate states for possible revenue losses during the transition period and he also said that the transition itself would be reviewed at appropriate time from the point of the impact on revenue collection.

Mukherjee told the states that the Centre would “step up the amount of compensation recommended by 13th Finance Commission, should the need arise, based on a mutually agreed formula.”

Speaking to newsmen following the meeting, empowered committee chairman and West Bengal Finance Minister Asim Dasgupta said: “The dual GST rate as suggested by the Center will be examined by states and we will get back to the Center on this issue next month.”Dasgupta said that several states had suggested a dual GST.