Finance minister Pranab Mukherjee has proposed a phased rollout of a dual-rate goods &

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services tax (GST) and suggested the initial rates.

He wants the rates to be 20 per cent on the majority of goods and 16 per cent on services at the introduction of GST on April 1 next year.

In a three-year timetable, he wants to merge these rates and finally peg GST at 16 per cent. Further, a small list of goods attracting a lower 12 per cent GST in the first two years has been proposed. This rate will be withdrawn in the third year.

The Mukherjee plan provides for the centre and the states equally sharing GST revenues. This will be over and above the compensation states will receive for any revenue loss following a switchover to GST.

In the second year of the rollout, GST on goods will be lowered to 18 per cent. This is to set the stage for a single rate of 16 per cent on both goods and services by 2013-14.

The empowered committee of state finance ministers led by Asim Dasgupta will meet on August 4 to consider Mukherjee’s plan.

Most states have already made similar proposals on GST during the past four years of negotiations.

The Dasgupta panel met on Wednesday separately to assess the Mukherjee plan and also for discussions with finance ministry officials.

“Our request to states will be to consider keeping the same rates. This mutually supportive approach will ensure that we have a single rate for central GST and state GST in the range of 12 to 20 per cent in the first year,” Mukherjee told state finance ministers.

He said the effective rate would work out to 15 per cent in the first year and that it would be acceptable to industry, trade and service providers.

Dasgupta said, “We’ll take a view on the proposed rates. We will discuss among ourselves.”

There already seems to be a consensus to keep petrol, diesel, electricity and alcohol out of the GST ambit.

The centre has also drawn up a small list of 99 items that would be exempt from GST. Mukherjee asked states to adopt the same exempt list.

He announced that states would be fully compensated for revenue loss that would arise out of the phase-out of central sales tax (CST) in 2009-10. The compensation money would be released immediately.

He wanted the states to come up with projections for the next financial year when CST would be withdrawn completely coinciding with the introduction of GST.

The centre said that the states that abolished purchase tax on foodgrain would be also compensated, as the levy will be subsumed into GST.

The 13th finance commission headed by Vijay Kelkar had proposed a Rs 50,000 crore package to meet the states’ revenue losses.

Meanwhile, the centre has proposed to set up a panel led by Nandan Nilekani, chairman of the Unique Identification Authority of India, and task it to draw up a roadmap for putting in place the IT infrastructure to handle GST related work.

Atul Gupta, senior director of indirect taxes at Deloitte, said, “The finance minister was clearly looking at convergence. He has drawn a middle path that will be accepted by states and industry. States were demanding differential taxation for essential and non-essential goods. I feel 20 per cent GST on goods not classified as essential is high. A rate of 16 per cent on services was expected. The fact that Mukherjee has come out with a specific set of rates signals that there is already some degree of consensus between the centre and the states.”

He added that once GST was properly implemented the consumer would benefit, as currently goods are taxed at 23-24 per cent, plus there are entry taxes, cess and surcharge.

Anita Rastogi, senior manager of tax and regulatory services at PricewaterhouseCoopers, said the rates proposed were viable and the consumer would benefit as GST would do away with cascading effect of a variety of taxes.