Indian States Agree To Three-Tier GST Rate Structure

by Mary Swire, Tax-News.com, Hong Kong

21 September 2009

The Empowered State Finance Ministers Group chaired by Asim Dasgupta, West Bengal finance minister, has agreed a three-tier structure for the new Goods and Services Tax (GST) – a lower rate for items of “mass consumption,” a standard rate for all other items, and a premium rate for precious metals. States will have the power to exempt items of local importance.

Dasgupta was unable to further explain the structure of the central government GST, but it is thought that there will be another separate, central tier of GST. The new tax replaces central government excise duty and service tax, and VAT and local taxes at state level. The specific rates that would be included in the GST are expected to be decided at a meeting with the finance ministry called for September 22.

There are reports speculating that the standard rate could be 8-9%, while the lower rate for essential commodities would be 4-5%, with the special rate for precious metals fixed at 1%; state-level VAT currently has two basic rates of 4% and 12.5%.

The Confederation of Indian Industry is pressing for the fruit and vegetable processing industry to be exempted from GST, as an incentive for the much-needed modernization of the sector to reduce food waste.

A joint working group has been set up to prepare the necessary amendments to the Constitution for GST implementation as well as draft GST legislation for central government and for the states. Draft legislation is expected to be ready in two months so that there is time for consultation with interested parties and appropriate amendments. The whole project is still on target for implementation by April 1, 2010. The working group comprises state and central government representatives, together with officials from the law ministry and the Central Board of Direct Taxes.

Other issues including revenue loss, the compensation formula and sharing of the service tax base still need to be resolved.

Some of the states, led by the Madhya Pradesh Finance Minister, Mr Raghavji, and including Rajasthan, Haryana, Chhattisgarh, and Tamil Nadu are reported to be wary about the haste in introducing GST, and bemoan the reduced fiscal autonomy.

Further, Livemint.com complains about the potential "tangled web" of rates that may be allowed in different states which would detract from the objective of "moving beyond the complexities of disparate tax regimes; and … unifying under a single Indian market, with limited distortions."

Recommended