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Excise, service tax set to converge
IN SEARCH OF RIGHT OPTION

Govt may scale down excise duty to the level of service tax i.e. 12%

Otherwise, it can proceed towards unified vatable GST of 14%

Scope of GST can be widened

First year of GST to be 2010; it could be introduced earlier

New Delhi, Dec. 17: Ahead of the next budget, the Congress-led government will be juggling around with service tax and excise rates to try come near an imaginary median rate.

It will also take a hard look at remaining tax exemptions with the aim to streamline them and work towards a unified goods and services tax (GST), which the government wants to bring in within the next few years.

Currently, service tax stands at about 12 per cent and average excise at 16 per cent. One option is to allow service tax to remain at 12 per cent and progressively bring down excise to that level by a series of two or three cuts. This, officials say, would imply a cut in excise duties in the coming budget.

Alternatively, North Block could work towards a median 14 per cent and then proceed towards working towards a unified vatable GST. A vatable tax is one where the tax paid on inputs can be claimed as credit in the final product. A unified tax would allow producers to claim tax credit for all input raw materials and services they use.

Justifying the move towards GST, top revenue officials point out that the task force on Implementation of the Fiscal Responsibility and Budget Management Act had observed “standalone taxation of both goods and services is structurally inconsistent with the scheme of input credit across goods and services, which is so vital to eliminating multiple taxation and cascading effects”.

Officials said the government is also expected to expand the range of goods and services subject to the tax to include education, healthcare and catering.

“Right now the timetable to eventually bring in GST is 2010, four years from now, but the empowered group of ministers on taxation, which comprises state finance ministers, will be meeting on the issue sometime later and they could vote to bring forward the time-table,” officials said.

The logic behind reducing the average tax level on manufactured goods stems from empirical evidence that successive lowering of taxes on manufactured goods since the economy started to liberalise in 1991 have led to an economic boom and this has meant more tax collections.

A note prepared on this issue says the growth rate of toiletries, white goods and automobiles, following a reduction in excise rates, has been so large that there has been a greater than normal growth in tax revenues in spite of the reduction in tax rates. This characteristic of demand in the Indian economy needs to be used to propel the economy forward.

“If excise duty is reduced to achieve Asean levels of indirect taxes, reduction of prices of manufactures from 130 per cent to say 120 per cent could trigger a demand boom, which could propel Indian economy into the big league," the note says.

The government believes that lowering the cost of manufacture in the country will also mean India will become more competitive in the global arena. This in turn will help India Inc face competition from imports in the domestic market on a more equal footing.

Officials said about 80 per cent of the world trade is in manufactures and they point out that India needs to tap into this in a bigger way, if it wants to increase its share of global trade from a current miserly 0.8 per cent.

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