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Centre and states should work to adopt the goods and services tax
January, 31st 2014

The states must be commended for prudent management of their finances in a slowing economy. The RBI's study on state finances shows an improvement in the consolidated fiscal position of states during 2010-13. The improvement was revenue-driven and also broad-based across states.

Sure, states benefited from a higher share of central transfers based on the Thirteenth Finance Commission award, but their own tax revenues also rose, leading to a reduction in the gross fiscal deficit (GFD). The budgeted increase in the revenue surplus-togross state domestic product (GSDP) ratio in 2013-14 will further improve their finances.

Expectedly, the budgeted GFD-to-GSDP ratio is lower than 3 per cent in a majority of states, in contrast to the Centre's figure of 4.8 per cent. Revenues from value added tax grew faster than the states' overall tax revenue in the three years to 2013-14, and that is striking.

It thus makes all the more sense for the Centre and states to work in the spirit of cooperative federalism to adopt the goods and services tax (GST). GST captures value addition and income across the production chain, and will boost tax revenues and growth.

The BJP should stop obstructing the tax. States should also raise user charges on electricity, especially given the concerns over mounting losses of state power utilities.

Free power and water will only dent their finances, and non-tax revenues. The RBI study also shows a rise in development expenditure: states have improved both overall finances and the quality of spending.

The capital outlay-GSDP ratio also increased in most states. A decline in overall debt-GDP ratio has also eased the interest burden, and helped states to cut down their nondevelopment spending. However, the RBI has warned that unreformed welfare schemes could strain state finances.

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