India may have to increase its value-added tax rates to around 20 per cent if it wants to implement a goods and services tax by 2010.
Even 20 per cent VAT would be lower than the VAT rates of some European countries where the standard VAT is between 15-25 per cent, Ine Lejeune, leader, global VAT and GST, of PricewaterhouseCoopers said.
Speaking to Business Standard, Lejeune said India could consider imitating the European VAT model of having a basic list of goods and services exempt from VAT, like food and medicine. In addition to the negative list, there is also a turnover-based exemption for small traders.
"There is a dual system in India which is complex. The services are taxed at the federal level, while states have a central sales tax (CST) and several other levies like octroi. The OECD principle is to have a goods and services tax which is neutral for business (ie these are refunded), a tax which is levied at the point of consumption and not origin and finally a tax which is certain and simple to operate," she said.
The CST system existing at the level of states in India is complex since it is origin based rather than being destination or consumption based.
"The CST has to be paid by the dealer first in his own state and then refunded by the destination state after filing Form C," she pointed out, adding that the CST should be withdrawn at the earliest to reduce the complexities for a GST.
Asked about the proposed move to allow states to tax intra-state services, she said such a scenario could generate legal complexities on which services were intra-state and which inter-state.
"A more desirable solution is to continue with the present regime where the services are taxed at the federal level, in order to move quickly towards GST," she said.
Lejeune pointed out that having a standard rate of between 15-25 per cent VAT in Europe, with Denmark having a rate of 25 per cent against 16 per cent in Germany, had not lead to displacement of business from one country to the other due to a good system of refunding VAT.
"Europe has a common document across countries for refunds, and has a centralised system where the taxes are pooled and then debited and credited for each country. India could explore a similar model," she said.
She said PwC had offered to provide its expertise in international VAT practices to the Indian government.