Finance minister P Chidambaram and Bihar deputy CM Sushil Kumar Modi are expected to discuss the contentious issues related to implementation of the proposed Goods and Service Tax (GST) on Thursday.
The discussion will also include the states' demand for more compensation for reduced central sales tax revenue. States, that collectively received R6,393 crore as compensation for 2010-11, have not yet reconciled to the fact that the payment stood reduced to the extent they raised state-level value added tax (VAT).
The outcome of the meeting between Chidambaram and Modi will also have a bearing on the required reduction in central excise and service tax from the current 12% for a smooth introduction of GST from April 1, 2013.
The combined Central-State GST rate could be in the range of 16-20%, necessitating a cut in excise and service tax. Considering the differences in opinion between the two parties, it remains to be seen if the unified indirect tax regime is close to reality. Chidambaram, however, has been optimistic about getting the GST Bill passed by the end of this fiscal.
A reduction in the 12% service tax, if implemented, may tempt the government to “further prune the negative list of services” as recently suggested by the Vijay Kelkar committee on road map for fiscal consolidation.
Besides, there is pressure on the government to reduce service tax on the first year life insurance premium to boost the insurance sector as well as to reduce the service tax burden on the end consumer across sectors (at the business to consumer level) to encourage consumption in a slowing down economy.
Revenue from service tax, now levied on all items except those on a negative list and an exemption list, has been growing faster than other forms of taxes.
Service tax collection, which rose 34% last fiscal from a year earlier, is expected to grow at 31% this financial year.