India’s biggest tax reform initiative — the Goods and Services Tax (GST) — could see a staggered implementation, starting with a nationwide unified tax system for goods from April 2016 and extended to services later.
India is currently fragmented into several disjoint markets, with each state levying a different set of taxes on goods and services.
If implemented, the GST can dramatically alter the tax administration by replacing this string of central and state levies such as excise, value-added tax and octroi with a single unified tax, thereby creating a common national market.
Under the new system, the Centre and the states will tax goods at identical rates and split the revenue equally. For instance, if 20% is the agreed rate on a certain product, the Centre and states will collect 10% each.
The same model will apply for services. Under current laws, only the union government taxes services.
Sources told HT the government is likely to introduce in the winter session of Parliament the Constitution amendment bill that will lay out the roadmap for GST’s implementation, first for products and later for services.
Implementation of the tax reform has been politically contentious with states fearing GST could rob them of fiscal powers and tax revenue.
For example, Maharashtra earns more than Rs 13,000 crore annually from octroi while Gujarat, a highly industrialized state, gets about Rs 5,000 crore from its share of the central sales tax (CST). Agrarian states such as Punjab and Haryana also earn more than Rs 2,000 crore from purchase tax.
All these states fear they will lose these revenues once the GST is introduced.
Most states also want petroleum and liquor to be kept out of the new tax regime.
The Centre will likely offer a fresh Rs 35,000-crore plan spread over three years after phasing out CST — a proportion of which goes to the states — to compensate them for revenue losses, sources said.
Over the last few years, the government has gradually brought down CST from 4% to 2% as a precursor to rolling out GST. As an interim measure, the Centre has also periodically compensated state governments for revenue losses.
The first installment – Rs 14,000 crore — of the new CST compensation plan is likely to be paid this financial year itself, with the balance over the next two years, sources said.
Last month, Prime Minister Narendra Modi and finance minister Arun Jaitley along with top finance ministry officials discussed in detail the current status of the proposed indirect tax system.
A robust country-wide information technology (IT) network and infrastructure to make the implementation seamless across state boundaries is also expected to be ready by April 2016.