THIRUVANANTHAPURAM: The rate of Goods and Services Tax (GST) of both the Centre and the states should ideally be fixed at around 19.5 per cent, noted economist and former chairman of the Centre’s Tax Administration Reforms Commission Parthasarathy Shome has said.
Shome was speaking at a colloquium on ‘Role of Taxation, Tax Administration and GST’ organised by Kinfra and Taxes Department here on Tuesday. He said that imposition of GST from April 1, 2016, will abolish “cascading taxes” that are currently being imposed on goods and services.
“If the Central and state GST crosses 20 per cent, then there will be a psychological effect on businesses which are currently paying cascading taxes to the tune of 28 per cent. Hence it will be psychologically good if the GST rate is fixed at 19.5 per cent,” he said. “With the introduction of the GST regime, we will abolish the service tax at the Centre, a part of CST, excise duty, taxes collected by the Centre at the import point and also the special additional duty of the states. Such a non-cascading structure will trigger more production, which will in turn widen the tax base and can also help in bringing down tax rates in the long run,” he said.
Shome added that the current tax revenue should be taken into account while fixing the GST rate so that a similar revenue could be arrived at once the GST regime comes into effect. The current proportion of tax share between the Centre and the state should remain the same even after introduction of GST, he added.
He said that petroleum products and alcohol have been kept out of the purview of GST. “The tax paid on petroleum by bulk users such as factories and transport companies cannot be credited against the output tax of such business houses. It will remain in the states from where the petroleum products have been sourced,” he cautioned.
The economist also warned against states being allowed to have a “band of tax rates”. Such tax differences will encourage clandestine transport of products from one state to another, he said. “I feel we should have a situation where states operate only a few rates and not a wide band of tax rates,” he said.
On Corporate Tax, Shome said that it would be ideal if the government fixes the rate at around 25 per cent. Also, tax incentives provided by the government should also be reduced.
Though the government has fixed the corporate tax at 34.61 per cent for domestic companies and 42 to 23 per cent for foreign companies, the average tax rate comes up to only 23 per cent due to a number of tax incentives that are being provided, he noted.
Shome urged the Centre not to introduce taxes in retrospective effect which would make economic activity difficult. He also called for extensive consultations between the government and the business community before fixing tax rates, as is the practice followed in many countries.