New Delhi: Setting the stage ahead of the meeting of state finance ministers on 7 January, the 13th Finance Commission (TFC) has in its report submitted to the government, proposed a Rs50,000 crore compensation package to nudge the state governments to immediately sign off on the implementation of what it described as a “flawless” goods and services tax (GST) that will be revenue-neutral.
While the commission has refrained from specifying the rate, leaving it to the Centre and the states, it has recommended that the tax base should be broadened to include even the real estate sector, a person familiar with the contents of the report said, asking not to be identified.
In a significant move, TFC has also recommended doing away with all cesses and surcharges—charged by the Centre and not shared with states—and subsuming all these within the GST framework. Gross collections of cesses and surcharges on Central taxes in 2008-09 was Rs53,918 crore.
The incentives proposed by TFC include the setting up of a safety net with a corpus of Rs50,000 crore to compensate state governments for any revenue losses they may suffer.
The commission has also suggested that the immediate emphasis of the Centre and the states should be to create the enabling environment for implementation of “right kind of” GST.
If indeed there is no revenue loss, then the funds in the corpus will accrue to the states based on the devolution formula prescribed by the TFC. Prashant Deshpande, senior director, Deloitte Touche Tohmatsu India Pvt. Ltd said: “A fund like this will definitely go a long way in addressing their (states) concerns.”
TFC’s recommendations cover a five-year period beginning April 2010. At present, based on the 12th Finance Commission’s recommendations, 30.5% of the Central tax revenues are transferred to states with a greater share to poorer states.
To create the enabling legal environment for the “right kind of” GST, TFC has suggested that Article 278 of the Constitution be restored.
This will allow the Centre and states to sign a tax treaty, which could then signal their joint intent of moving ahead on GST. This, the same person said, was necessary so that businesses and other economic entities have sufficient time to undertake the transition.
Article 278 allowed erstwhile princely states to enter into an agreement with the Union government with respect to levy and collections of a Central tax within the state.
This section of the Constitution was removed in 1956 to bring about reorganization of states based on a linguistic framework.
Subhash Kashyap, former secretary-general of the Lok Sabha and a constitutional expert, is in favour of greater devolution of revenue from the centre to the states, but skeptical about reintroducing and revisiting Article 278 as it was meant for princely states.
Emphasizing the need to get the “design” right, TFC has also recommended a three-year time frame for the GST to be fully in place.
GST is an attempt involving the Union and state governments to create a common market in India to replace the current system of fragmented markets which result in higher prices and taxes.
P. Chidambaram, who was finance minister between May 2004 and November 2008, had set April 2010 as the deadline for India to transition to GST. However, on 24 December 2009 finance minister Pranab Mukherjee said the transition to GST would overshoot the deadline as some states were not yet ready to do so.
A task force on GST set up by TFC had suggested a single rate for all goods and services which needed to be taxed as the ideal architecture for a “flawless GST”.
So far, the proposal thrown up by states has an architecture with three rates for goods and one for services. The rule-of-thumb in GST has been that the greater the number of rates, the higher the incidence of tax. However, the states, fearful of suffering revenue losses and being able to successfully sell the GST concept to people, have proposed multiple rates—a standard rate and a substantially lower rate for mass goods while exempting some goods altogether.
TFC’s recommendations are based on the report of its task force on GST, which was reported by Mint on 16 December. The task force had proposed a single GST tax slab of 12%, which it claimed was revenue neutral.
It had also recommended the setting up of safety net corpus of Rs30,000 crore to be paid out in the event of revenue losses incurred by states. TFC has enhanced this by another Rs20,000 crore.
Manish Ranjan contributed to this story.