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Since the constitution of GST Council on 12th September, 2016, commendable progress has been made towards implementation of this major tax reform in the country. GST council has already arrived at a consensus on the most contentious issue in GST design, i.e., the rate structure. The mechanism of compensation has already been worked out.  The next phase as it appears is to distribute the commodities and services across various rates other than those specified in the higher rate category.  

Combined tax revenue of the Union and states to be subsumed under GST is roughly Rs. 8000 billion. In this combined kitty, central revenue accounts for roughly 46 per cent and State revenues account for 54 per cent. As a percentage of centre’s tax revenue, the share of taxes to be collected under GST works out to be 40.17 per cent. Though the rate structure is decided, appropriate apportionment of this rate between Union and State governments is critical so as to ensure revenue autonomy of each level of government. On distribution of Revenue Neutral Rate between the Union and states, Report of the Committee on RNR headed by Chief Economic Advisor noted that allocation of rate “must reflect the revenue requirements of the Centre and states so that revenues are protected. For example, a standard rate of 17% would lead to rates at the Centre and states of say 8 percent and 9 percent, respectively because that is roughly the ratio of GST revenues that would have to be generated by the Centre and states assuming that the 2013-14 data on which these estimates are calculated remain valid. According to the Committee it would be preferable to keep all other rates identical between the Centre and states to minimize distortions and facilitate compliance.”
If we consider combined indirect tax to GDP ratio for the year 2013-14, it was 11.39 per cent of which Union government’s indirect tax to GDP ratio was 4.65 per cent. In other words, states on an average was collecting around 60 per cent of the total indirect taxes in the country and that was roughly the entire own tax revenues of states. States do not have any major direct tax sources. Since predominate source of this indirect tax revenue is VAT on goods, it is expected that post GST, this revenue is protected through appropriate rate structure in which standard rates for state revenues are fixed appropriately.
Since we are having a dual GST in an overlapping tax base and preferably single rate across the country, substantial fiscal autonomy would have to be surrendered by both levels of governments. A unified GST thus not only have implications for trade and business but also on the basic federal structure, particularly the fiscal structure and resultant vertical and horizontal imbalances. In this context, protecting state level fiscal autonomy is critical. One of the key aspects of fiscal autonomy is the ability to fix rate. Since the consensus seems to have single rate across the country, apportionment of rate should be such that states are able to protect their revenues even if they give up their ability to fix rate to ensure harmonization of tax rate for common market.
In a multi-level fiscal system, fiscal autonomy is just not independent financial power of sub-national governments. It is critical for accountability. In this context, it is worth mentioning what Amaresh Bagchi observed when the idea of a national GST was first announced by Shri P. Chidambaram in his 2006 Budget: “Revenues that flow from the Centre cannot be regarded as something that the recipient governments are politically responsible for raising. Politicians and bureaucrats may find it convenient to avoid the onus of raising the monies they like to spend, but that way lies the road to fiscal irresponsibility.” Going a step forward it may not be wrong to argue that GST council should apportion the rate structure in such a way that it reduces the existing vertical fiscal imbalance and provide appropriate fiscal space for greater accountability of all levels of governments.
The constitutional amendment itself has imposed constraints in implementing a broad base GST by keeping petroleum products out of the purview of GST. This has rendered base partial and allowed continuance of cascading of taxes.  As per the amendment, these goods shall not be subject to the levy of Goods and Services Tax till a date notified on the recommendation of the Goods and Services Tax Council. As I also argued elsewhere, it is important that a specific date for inclusion of these items under GST is decided by the GST council at the earliest and acted upon towards universal application of coverage of the base of tax for an efficient outcome. 
The author is Professor, NIPFP. Click here for detailed profile.
The views expressed in the post are those of the author only. No responsibility for them should be attributed to NIPFP.
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