UPA set to roll out new fiscal reforms

UPA set to roll out new fiscal reforms

New Delhi: Fiscal discipline will be one of the themes of the Budget that the finance minister will present to Parliament on 26 February.

The cabinet’s decision means the government, in effect, has accepted TFC’s blueprint for fiscal consolidation that revolves around a new expenditure management strategy which ensures commercial viability of projects and also tackles the problem of burgeoning subsidies. It also means a reaffirmation of the government’s disinvestment agenda and an endorsement of a three-year transition to a single goods and services tax (GST) regime.

The acceptance of TFC’s recommendations signal the government’s return to fiscal rectitude, a move that is significant in the context of the dramatic fiscal slippage in 2009-10—to 6.8% of gross domestic product (GDP).

While one dimension of the Budget will reflect the recommendations of TFC, another will reaffirm the government’s inclusive agenda, particularly with respect to financial inclusion—a recent study of the Reserve Bank of India found that nearly 70% of rural households do not have access to institutional credit of any kind—and food security.

TFC is a statutory body tasked with suggesting ways in which taxes should be shared between the federal government and the states. The report is expected to be tabled in Parliament on 25 February.

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The commission, chaired by former finance secretary Vijay Kelkar, was constituted in 2007 and its terms of reference expanded in August 2008 to “suggest a suitably revised road map with a view to maintaining the gains of fiscal consolidation through 2010 to 2015".

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 Union government’s tax revenues are transferred to states with a greater share to poorer states.

Significantly, as Mint had reported on 5 January, TFC has fashioned a Rs50,000 crore incentive-cum-safety net package for states to transition to GST.

If the states do suffer a revenue loss, then this corpus will be used to compensate them; alternatively, it would be paid out to states based on the new devolution or sharing formula being laid down by TFC.

The incentives, the same government official said, would hopefully break the deadlock between the Centre and states and begin the transition to GST. The two sides differ on the structure, with the states wanting a dual-rate GST.

TFC has endorsed what it describes as a “flawless" GST that will include all items and have a single rate; it has however not recommended any rates, leaving it to the Union and state governments.

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 a reorganization of states based on a linguistic framework.

TFC has also recommended a fresh approach to disinvestment of government stakes from public sector units.

The recommendations argue for a review of the country’s “public capital assets"—look to exit from existing public sector assets, where the private sector is either a significant or dominant player, and invest the proceeds in creating new public goods such as rural roads.

This would signal a substantive ideological shift in the government’s approach to disinvestment.