Kelkar says GST compensation to states can exceed Rs 50k cr     

In the grand bargain for implementing the goods and services tax (GST), the Centre can even consider a compensation package that is higher than Rs 50,000 crore for states, according to Vijay Kelkar, chairman of the Thirteenth Finance Commission.

“If necessary, an additional sum can also be made available,” he said on Wednesday in an interaction with FE . In its report tabled in Parliament in February, the TFC has suggested for states a compensation of Rs 50,000 crore to provide for the possibility their revenues may slip. But it has made it conditional on the states agreeing to introduce the GST before 2013 at a single rate, along with other features suggested by the commission.

The empowered committee of state finance ministers had demanded Rs 1 lakh crore as the compensation package for introducing the GST. However, states will not be entitled to any compensation if they adopted a model different from the one suggested by the TFC. States are expected to commence fresh talks on the GST design this month, though no date has been finalised yet. States would be the immediate beneficiaries of the GST as they are large buyers of goods and services, Kelkar said. They would save substantial taxes on these purchases. “For states it is budget-positive, not even budget-neutral.”

Having a GST regime with an appropriate design, which encompasses the real estate sector, would go a long way in reforming India’s indirect tax regime, said Kelkar, also the former finance secretary. “The GST is an important part of India’s march towards modernisation. India is now part of the G-20. We need to resemble the guys on the high table.” The GST would replace the current multitude of central and state indirect taxes, and create a common market across India for goods and services. This single biggest reform ever since the industrial de-licensing in 1991 could be worth $500 billion for India, Kelkar has estimated. He said an effective GST should make no distinction between goods and services. It should also have a common tax base, common exemption limits, compatible IT systems, and include the real estate sector. “The simplest thing in the world is a single rate with no discrimination. Any exception creates discrimination.”

Finance minister Pranab Mukherjee said in the Union Budget 2010-11 that he hoped to implement the GST from April 1, 2011. Indirect taxes such as excise duty and additional excise duty, service tax, CVD, all surcharges and cesses, VAT, CST, luxury tax and entry tax should be subsumed in the GST, the commission said in its report. This would lower the prices and remove distortions, besides making the tax regime simpler. The manufacturing sector in India is substantially overtaxed at about 26%, and the GST would make it much lower, he said. When asked about the likely revenue-neutral rate, Kelkar said, “We are not concerned with the rates, which should be negotiated with the states. What is important is the design of the GST.” According to the GST task force of the TFC, the tax base should be around Rs 31 lakh crore and the rates should be 7% for states and 5% for the Centre. The states are, however, demanding a combined rate upwards of 16%.

Kelkar said his interaction with the states reveal that they are far more focused on pruning deficits and adhering to fiscal discipline. “There aren’t any states that are anti-reforms,” he said, being optimistic that a consensus would emerge soon between the Centre and the states on the GST model. The commission has also recommended that the empowered committee of state finance ministers should be transformed into a statutory council and the compensation should be disbursed quarterly on the basis of the recommendations made by a three-member committee.

“It can technically become a sub-committee of the Inter-State Council, which is a constitutional body. The idea is for everybody to participate equally,” Kelkar said. Such a system exists in developed countries, he said.

Source: Financial Express, India, dated 08/04/2010