New Delhi: The 13th Finance Commission (TFC) has dangled a Rs50,000 crore carrot to states to win their cooperation in the move to a common Indian market by rolling out the goods and services tax (GST) by end March 2013, but pointed out the Centre would remain the first among equals with veto power.
Transitioning to GST in the wake of a “grand bargain” between the Centre and the states is one of the key recommendations of TFC as the new tax would boost economic growth. Studies commissioned by TFC have shown GST’s introduction could boost the gross domestic product (GDP) by up to 1.7%, or Rs99,450 crore based on current fiscal’s estimates.
“I think it is (a) very significant carrot,” Satya Poddar, partner at Ernst and Young, said. “Rs 50,000 crore is almost a third of states’ current annual revenues.”
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Introduction of GST would require a constitutional amendment as the Constitution currently does not provide for sharing of the tax base between the Centre and the states. TFC has said the positive impact of the roll-out of GST design it has recommended is significant enough to call for a financial incentive.
The Rs50,000 crore grant suggested by TFC is to be provided to all states in aggregate. The grant would offset revenue loss any of the states might incur in the transition. The unspent part of the grant would be distributed among the states on 1 January 2015, according a formula proposed by TFC.
The model GST recommended by TFC is based on a report on the subject brought by its own task force. The essence of the model GST is that practically all indirect taxes collected by the Centre (except customs duty) and all indirect taxes of the states are subsumed. The outcome of this model is a single, revenue-neutral tax rate of 12% (adding both the Centre and the states’ rate).
GST is expected to lend stability to the fiscal environment. TFC has proposed a structure which would make it impossible for unilateral change in tax rate. For instance, 75% of the states would have to agree for an increase in tax rate. The Centre, however, has been given exclusive veto power on such a move.
Currently, GST negotiations at the state level are spearheaded by a body of state finance ministers, dubbed the empowered committee of state finance ministers. TFC has recommended statutory status for this body.
If the model GST is rolled out after 2013, TFC has proposed a cut in incentive by Rs10,000 crore for every year. If the states agree to transition to a GST which is inconsistent with the commission’s model, TFC has recommended the Rs50,000 crore fund be scrapped.