|On the road to GST|
|Wednesday, 11 January 2012 00:00|
After GSTN, state FMs agree to service tax negative list
Though state finance ministers continue to debate the conditions under which the GST—top on the list of economic reforms right now—is to be introduced, they made a big forward move on Monday while approving a negative list for services that are to be brought under GST. Immediately, without a constitutional amendment, the Centre can introduce this in the Budget and, with a larger list of services to tax, it can look at a 30-35% higher tax base immediately. Till now, the government kept adding to the list of services it would tax each year, but now it can tax all services that are not on the negative list. Last August, the state finance ministers also agreed to set up the GST Network (GSTN), a common platform where a PAN number will be used to identify all shops/dealers—this will help states, and the central taxman, do all manner of cross-matching of data to check tax evasion, a vital pre-requisite for a nationwide GST. In other words, despite everything, there is positive movement on GST. How fast a final GST will take will depend on how soon the Centre is able to convince states of its intent—states complain compensation for losses incurred while introducing VAT is delayed by at least a year and there are disputes on the amounts due as well—and a final decision is taken on what to exclude from GST. Excluding too many items from it will make GST patchy and not allow the taxman to track transactions between firms, vital to prevent tax theft.
It is unfortunate that areas like construction have been put in the negative list—construction accounts for 8% of GDP and is therefore a lucrative tax source apart from the fact that its inclusion in the GST chain allows taxmen to track a traditional source/conduit for black money. With service tax accounting for just 10% of all tax collections as compared to the service sector’s 70% GDP share, the importance of GST is apparent. However, the numbers need to be adjusted. Once you remove construction and government services, taxable service sector GDP is a lower 45%. You then need to make allowances for the exemptions being given to firms which have a low turnover and that part of service tax that has already been captured by excise duty (excise duty is paid on transport services availed of by Godrej & Boyce, for instance, as they are part of the refrigerator’s manufacturing costs) and you’re left with a taxable service GDP of around 25%. If service-tax-to-total can go up from 9% right now to 12% as a result of Monday’s agreement, that’s a step forward.