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Consensus eludes GST, rollback
February, 06th 2010

The government is divided over when to roll out aggressive belt-tightening measures to achieve fiscal consolidation. Though there is some broad consensus that the stimulus measures should be rolled back the next fiscal year, policymakers are split over the targets to be set for the year. While some of them are of the view that liberal targets should be fixed keeping in mind the ruling coalitions intention to expand its social sector schemes, others call for tougher targets .

The political leadership believes that flagship programmes, such as the National Rural Employment Guarantee Scheme, Jawaharlal Nehru National Urban Renewal Mission, Mid-day meal scheme and Rajiv Gandhi Drinking Water Mission, had a role in bringing the Manmohan Singh government back to power. It is clear that more such schemes to ensure right to education, food security and slum development will be announced next year.

As per the roadmap that is currently under deliberation , the government is looking at a fiscal deficit -- the difference between the governments total expenditure and its total receipts less borrowings -- target of 6.1% of the gross domestic product for 2010-11 , instead of 5.5% set for the year in last years budget.

Though it is still unclear which of the factions will win the debate, those who stand for liberal fiscal targets definitely have an advantage, considering the ruling ideology of the nation.

Tax excesses

The central and state governments are yet to finalise a mutually acceptable date, but hectic efforts are on to finalise the framework for the proposed central goods and services tax. By now it is certain that the comprehensive indirect tax reform cannot be implemented from April 1, 2010 as planned.

The task force set up by the thirteenth finance commission headed by Vijay Kelkar had suggested a central GST of 5% and a state GST of 7%. As per the calculations of the Centre and various state governments, the revenue-neutral rate will come to around 16-17 %, much above the task forces assumption of 12%.

An agreement is difficult to arrive at because the state governments may not be willing to part with cash cows such as real estate and stamp duty, which are included in the GST model suggested by the taskforce. Given all these constraints, there are indications that the government will settle for a 7% central GST rate.

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