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The Constitution
emphasises the role of the Centre in redistribution and assigned most of the
buoyant sources of tax revenue to the Centre. This has resulted in a tax system
where the Centre collects 68% of the revenue, with the remaining revenue as
states’ share. Given this bias in the allocation of income-elastic resources to
the Centre, further transfer of resources to the Centre will not be based on the
tenets of sound federal finance.
While it is ideal to have a single GST rate, a review of GST around the world
indicates that many countries have two rate categories. In a democratic set-up,
it is difficult to have just one rate, especially if the rate is high enough to
affect the aam aadmi. In some countries, such as Canada, where there is only one
rate, the rate is just 5% and the income-tax department sends refunds for the
tax that a poor person pays on account of the GST levied on his purchases.
For revenue reasons, it is not possible for India to have a low rate of GST. One
cannot even visualise an effective coordination between the GST and the
income-tax departments to give a refund of GST to people below the poverty line.
Therefore, it is advisable that the GST should have two rate categories: 4% on a
select necessities and a standard rate of 8% on all other goods and services.
The standard rate could be the RNR. In fact, this standard rate has been
discussed on the sidelines of various meetings of the empowered committee.
Projections of revenue from GST for the period of award of the Thirteenth
Finance Commission (TFC) indicate that the states need not have a major concern
regarding the loss of revenue under the GST regime.
Estimation of GST revenue is, however, fraught with limitations in the
availability of data that further puts a constraint on the methodology to be
used for estimating revenue (GST in India: Structure, Administration, and
Revenue Implications). Therefore, based on the availability of data, three
approaches — revenue approach, turnover approach and the consumption approach —
are used to estimate revenue from GST. Further, the revenue approach could
follow three methods: growth rate method, buoyancy method and tax-GDP ratio
method. While the first two methods are used to estimate resources accruing from
the central taxes, the tax-GSDP method is used for estimating the revenue from
state taxes.
Following the above approaches, the FPEPR has made estimates of revenue for the
TFC (http://fincomindia.nic.in) based on the current rates of cenvat and service
tax, and the present base of state VAT and related taxes. In doing so, the study
uses the turnover approach (for goods) and consumption approach (for services),
for estimating revenue from CGST and the revenue approach (tax-GSDP ratio) for
goods and consumption approach (for services) for SGST.
The revenue estimates for CGST and SGST indicate that the revenue would almost
be the same in 2010-11. The projected revenue for the later years also shows a
similar trend. In fact, the yield from SGST is a little higher than the level of
the current projected revenue for all the major states. The situation is similar
for the other special category states.
Here, it is important to note that in estimating this revenue, it is assumed
that the structure of the Indian economy during 2010-11 to 2014-15 would be
stable. The economy is expected to grow at a faster rate as compared to 6-7% per
annum in the past. It is also expected that the proposed GST will have better
tax compliance, improved transparency and greater mobilisation due to scientific
risk management policies adopted by the states.
It is also envisaged that greater integration of the Indian economy with the
world economy would make an impact on the overall trends in the tax revenue.
Further, the integration of the Indian economy coupled with development of the
economy will result in a change in the basket of GDP and composition of
consumption.
The above RNR — with a low rate for a small list of necessities — and the tax
base of GST will not lead to a major change in the basic structure of allocation
of resources between the Centre and the states. The states would still continue
to collect 32% of the revenue that they are collecting today. Also, the
regulatory taxes — such as motor vehicles tax and state excise — and taxes on
income and property — such as stamp duty and registration fee — assigned to them
by the Constitution would continue to be with them, giving them the leeway for
mobilising the much-needed resources in times of necessity.
Source:
Economic Times, India, dated
29/04/2010
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