Finance Minister P Chidambaram on Monday said the Budget has taken a major step forward towards a single goods and service tax (GST) by integrating service tax and excise duties.
"Eventually, we will have a goods and services tax," he said at a post-Budget meeting with CII in New Delhi.
The government intends to hike service tax rates slowly to make it at par with excise duty rate of 16 per cent for most items before integrating both taxes under a single GST.
Chidambaram said the Budget has taken a major step towards GST by allowing industry to rebate service tax against excise and vice-versa. This would bring down the effective tax burden on services to only 6 per cent.
"When you rebate ST against excise, the effective ST rate will not be 10 per cent but will come down to 6 per cent," the finance minister said.
Chidambaram asserted that the service tax rate in the country was not high as world over the GST rate was about 16-20 per cent.
The service tax rate was raised to 10 from 8 per cent in the Budget to attain about 50 per cent growth in ST collection at about Rs 12,000 crore (Rs 120 billion).
He also justified service tax on more items saying "if cars can have a excise duty, if tyres can have excise duty, consumer goods can have excise duty, services should also bear a duty."
The service tax has been extended to 15 more areas to cover a total of 71 services.
Flexible labour laws in SEZs
The government also hinted at flexible labour laws in Special Economic Zones as part of the comprehensive legislation on SEZs, which will provide for new fiscal and regulatory regime.
"The Common Minimum Programme talks about SEZs and shown some flexibilities. I support some flexibilities...we will do our best," Chidambaram said.
But the UPA partners would have to be consulted and the matter has to be taken up in the Cabinet before taking a final decision, he said.
Elaborating on India's export strategy, he said the Commerce and Industry Minister Kamal Nath will unveil a new foreign trade policy in early August and there will be a separate bill on SEZs, which would have new fiscal and regulatory regime.
Chidambaram considered the duty drawback as quite an "efficient" mechanism, but said the rates and other details would have to worked out with the commerce ministry.