PC gears up for tax reforms act

NEW DELHI: The forthcoming budget will lay down the broad road map for far reaching indirect tax reforms, which will include implementation of state VAT, introducing a goods and services tax act and creating a structural link between state VAT and central VAT. A conceptual framework for this is set to be outlined even if the implementation may happen over the next few years. States have agreed to switch over from the existing sales tax system to a value-added tax system (VAT) by April 1, 2005. Finance minister P Chidambaram is set to take credit for facilitating this decision â€” to create a truly unified domestic common market â€” in the 2004-05 budget. The budget would also signal the next stage of tax reforms â€” integrating taxation of goods and services. The centre is, in fact, considering a proposal to enact a goods and services act (GST) in the medium term, which would integrate service tax legislation with the central excise law. The tax reform measure would mean harmonising the service tax rate with a cenvat rate on goods. Right now, tax on services is at 8% while the cenvat is 16%. The government has a few options. One option is to raise the service tax to 16%, without tinkering with the cenvat. The second option is to lower the cenvat to, say, 14% and raise the service tax to this rate. The CBEC is understood to have opposed lowering the existing cenvat to 14% â€” a prescription of Kelkar panel â€” citing revenue considerations. The CBEC is in favour of retaining the cenvat at 16% and raising the service tax in a phased-manner. A final decision is yet to be taken. Right now, a service provider is not allowed to take credit on duty paid on goods. An integration of the cenvat credit and service tax credit schemes will enable the service provider to avail credit and reduce the cascading affect on taxes. The government is yet to enact a separate service tax legislation, although states have ratified the constitutional amendment, which empowers the centre to levy tax and the centre and the states to collect and appropriate the proceeds. The draft service tax bill, piloted by the finance ministry, has not passed muster with states. They reckon that the bill, in its present form, would not yield them significantly higher revenues. Finance minister has promised a review of the bill after the budget. States levy taxes on some services such as entertainment, passenger and goods, electricity consumption etc. They require revenues to offset possible losses arising from transition to VAT. The Govinda Rao panel on service tax had made out a case for integrating the tax on services with those on goods all the way up to the retail stage to evolve a destination-based consumption type retail stage VAT. Canada, for instance, has a goods and services tax, which is a multi-level state tax. The tax is a 7% charge on all goods and services, except essentials like food, medical services and rent. Exports are exempt. Low income individuals can also receive a GST rebate calculated in conjunction with their income-tax.

PC gears up for tax reforms act

The forthcoming budget will lay down the broad road map for far reaching indirect tax reforms, which will include implementation of state VAT, introducing a goods and services tax act and creating a structural link between state VAT and central VAT.

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