Vijay Kelkar, former finance secretary and Chairman of the 13th Finance Commission on Friday said the recent proposal of the government to have a four rate slab for the Goods and Services Tax (GST) rate was “disappointing” as it “robs the GST of its efficiency enhancing potential”.
Kelkar said with the tax rate fixed by the GST Council, the growth impact on the economy will be only one fourth of the high potential impact that the 13th Finance Commission had estimated. Apart from this, the proposed tax structure will lead to high compliance costs and classification disputes. Kelkar also said the next GST structure may lead to “potential slackening of tax efforts by the States as they have been promised 100 per cent compensation of the shortfall”.
“To me the approach outlined by the authorities signals a disappointing beginning which well could have been otherwise; a thundering take off to shock and awe the domestic and international community and capital markets,” said Kelkar while delivering the Shankar Aiyar Memorial Lecture in Chennai on Fiscal Reforms in the Federal Framework.
“Growing adverse reactions due to the unfolding of these problems will, I am sure, persuade the authorities to
change its approach and follow a path more like the one outlined by the 13th Finance Commission and once again
seize the initiative on stimulating growth and equity. I have no doubt that we will eventually move from one nation, one tax to one nation, one tax, one registration and one rate and I am sure this single rate will be closer to 12 per cent,” said Kelkar.
On fiscal federalism, Kelkar said if vertical and horizontal imbalances are not satisfactorily resolved, it can
lead to political discontent that can threaten national security. Kelkar said India needs serious policy intervention to reduce regional disparities in per-capita incomes between the most and least developed regions of the country.
“For instance, in developed countries the ratio of per-capita incomes between the most and least developed regions
seldom exceeds 2, whereas in our case it can be a high 5 to 6…..This issue too if kept unresolved can lead to a
serious threat to Indian integrity. This is thus a fit case for serious fiscal policy intervention,” said Kelkar.
Kelkar also said the government should broaden the role of Niti Aayog and give it resources for giving grants to the lagging States and regions. This will help to attain growth acceleration and reduce developmental gap.