India - New finance panel to draw GST road map

The government has clearly signalled its commitment to bring in a Goods & Services Tax (GST) at the Centre and states by 2010.

It has decided to mandate the 13th Finance Commission to prepare a road map for the introduction of the GST. The commission will also decide the path to be taken by the government once its obligations under the FRBM Act are fulfilled.

The two additions to the Finance Commission’s terms of reference are very significant. Since the commission is a constitutional body appointed every five years, its recommendations are mandatory for the Centre and states. The commission spells out the allocation of the tax kitty between the Centre and states, as well as the rules for inter se allocation between states.

The finance ministry will soon announce the composition of the Commission. It will be expected to give its award by the middle of 2009. C Rangarajan headed the 12th Finance Commission.

Currently, a high-powered committee of officials from the finance ministry and the states are working on the GST implementation issues. The group is likely to submit its report to the empowered committee of state finance ministers by the end of October. Expanding the terms of reference of the commission will ensure rollout of GST within the deadline.

Meanwhile, as the government is confident that it will be able to attain its deficit targets on schedule, it has decided to look at life after FRBM. The Finance Commission will advise the government whether another FRBM-like Act needs to be drawn up to keep government finances healthy.

The government has set a target of 1.5% of GDP as the revenue deficit for 2007-08, and has estimated the fiscal deficit to reduce to 3.3% of GDP. Under the Fiscal Responsibility & Budget Management (FRBM) Act, the government is required to reduce the revenue deficit–at 2.6% of GDP in 2005-06–by 0.5 percentage points a year and eliminate it altogether by 2009.