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VAT to GST not now
December, 23rd 2009

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, said the minister.

Time does not seem ripe for implementing Goods & Service Tax (GST) replacing Value Added Tax since the share of taxable services in the consumption basket of the household is very small in various states, especially in Madhya Pradesh. Therefore, the introduction of GST would cause heavy revenue loss to under-developed states including Madhya Pradesh, which would adversely impact development.

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.

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