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Shake-up in tax share
December, 31st 2009

The 13th Finance Commissions recommendations on efficient tax and expenditure management and the sharing of tax receipts between the central and state governments could feature in the next Union budget.

The recommendations (of the Finance Commission) will be reflected in the budget, finance minister Pranab Mukherjee told reporters but did not give the details.

Headed by Vijay Kelkar, the commission submitted its report to President Pratibha Patil today.

The report, after being adopted by the cabinet, is likely to be tabled in the budget session of Parliament.

We had been asked to suggest a new path for fiscal consolidation. We have recommended a fiscal path for the next five years (2010-15). The report dealt with the sharing of tax revenue between the Centre and states, distribution of funds among states and support to local bodies, Kelkar told reporters.

Apart from suggesting a formula for sharing revenues, the panel was asked to look into the impact of the proposed goods and services tax (GST), scheduled to be introduced in April.

The panel was also asked to study the impact of including bonds issued to oil and fertiliser firms and the Food Corporation of India in the budget. Such bonds are kept off the balance sheet and are not counted as government expenditure.

At present, the states and Union territories get Rs 1.64 lakh crore a year, or around 30 per cent of the tax collected by the Centre. The total tax revenue of the government has been estimated at Rs 6,41,079 crore during 2009-10. The revenue has two parts: that which can be shared with the states and that which will be with the Centre.

The 12th Finance Commission had recommended that 30.5 per cent of the central taxes which was shared with the states should be given to the states and Union territories.

The commissions report is important in the context of the ongoing reforms in indirect and direct taxes that will have a bearing on collections.

The government proposes to introduce GST that will replace levies such as excise, VAT and service taxes next year.

The Direct Taxes Code, which will replace the Income Tax Act, 1961, is also open to public debates and suggestions.

A task force set up by the 13th Finance Commission on GST has recommended a 12 per cent rate. States, however, say they will not settle for a rate less than 15 per cent.

Latest talks have suggested that there should be two slabs a lower rate for essential items and a higher one for most items.

There will also be an exempted list of items and a rate of 1 per cent for precious metals such as gold, platinum and silver.

Last year, the government had put fiscal prudence on the back burner after it had to step up spending to insulate the economy from the global financial meltdown.

Fiscal deficit, a reflection of government borrowings, is estimated to touch 6.8 per cent in 2009-10, up from 6.2 per cent in the previous fiscal, mainly because of the stimulus measures.

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