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However, in relation to the draft note for submission to
the Finance Commission regarding the amount of compensation for the likely
revenue loss from GST to the states, it may be pointed out that the loss should
be adequately compensated in proper manner so that development activity in the
states does not suffer.
It may be mentioned here that in the very first year of
the implementation of the proposed GST, Madhya Pradesh would incur a revenue
loss of Rs. 4500 to 5000 crore in terms of own tax revenue and devolution.
This issue reverberated at a meeting of the Empowered
Committee constituted by the Central Government on GST in New Delhi recently,
when Madhya Pradesh Minister for Finance and Commercial Taxes Raghavji put forth
his views on the subject. He suggested that CAG should be the chairman of the
proposed committee for approving the compensation to states. The revenue
Secretary and State Chief Secretary should be members of this committee. The
appellate committee should consist of Union Finance Minister and state Minister
for Finance/Commercial Taxes. A Cell should be created in the office of CAG for
secretarial assistance to the committee.
It may be pointed out that the tax base of GST is being
over-estimated. Instead of Rs. 21 lakh cr as estimated by TRU the states would
get around Rs. 13 lakh cr only, as per our estimate, he added. He said that
since the additional tax base from services would be very small. The RNR for
standard rate goods would have to be very high to compensate for the loss of
revenue due to abolition of CST. Therefore, the standard for goods in SGST
should not be higher than 10% for its acceptance by trade and industry. In such
a situation the projected revenues from SGST for 2007-08 would be Rs. 1,03,202
cr. if the tax rate for the services and the standard rate for goods are both
kept at 10%. If both these rates are kept at 9% the projected revenues would be
substantially lower at Rs. 96,051 cr. only.
As per our assessment the likely revenue loss for states
in SGST would be Rs. 43,946 cr. for 2007-08 and for year 2010-11 it would be Rs.
67,536 cr if annual growth rate of 15% is assumed. Therefore, the minimum
compensation amount required for the loss in their own tax revenues would be Rs.
60,000 cr. for year 2010-11 and not Rs. 35,000 cr. as mentioned in the draft
note.
Undoubtedly, the likely revenue from taxation of
services would not be sufficient to fully compensate for the loss in revenues
from reduction of standard rate for goods applicable under VAT, removal of
cascading in VAT on account of CENVAT and the strict adherence to the
destination principal in SGST. Hence the scheme for compensation must provide
for automatic ad hoc release of at least 80 per cent of such amount in monthly
instalments to be adjusted subsequently to maintain the cash flow of states. The
compensation scheme should have the provision that the states should submit
provisional account after first and third quarters every year to enable the
proposed committee to increase or reduce the monthly compensation amount, as the
case may be. However, endorsed the proposal to select 2009-10 as base year for
determining the compensation.
In addition to the huge loss in their own tax revenues,
states would also suffer substantial loss of revenue in the devolution because
revenue from CGST would be below the projected revenues from CENVAT and service
tax. Backward states have relatively higher dependence on devolution. The
Central Government should also compensate the loss in devolution on account of
GST.
It is a matter of serious concern as to where from the
Central Government would find resources of this magnitude for compensating
states. He expressed fear that either central grants for development programmes
would be reduced or share of states in certain ambitious programme for
education, health and rural development sector would be increased. This would
create serious difficulties for state finances. The condition of state finances
after five years is also worrisome. Therefore, it will be wise to defer the
decision to implement GST until the under-developed states are fully geared up
for this.
Source:
Central Chronicle, India, dated
22/12/2009
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