mplementing the Goods and Service Tax (GST) will pose the biggest challenge in the Centre, state fiscal relations, former governor of the Reserve Bank of India YV Reddy said on Saturday.
“In Goods and Services Tax, the major new challenge is that so far Centre used to levy its tax, the state used to levy its tax, the jurisdiction was clear…today after this (Constitutional) amendment, the tax powers virtually cross each other. They have to agree on rates, the categories to be excluded. Tax powers are based on the recommendations of the GST Council. Now the Centre and states have to together determine the tax rates. And they also have to work together in implementation…so we have serious problem for the first time,” he said at an event organised by Hamdard University.
“It has potential for great success. It has potential also to be of great difficulty…this is going to be the biggest challenge in Centre- state relations,” he said while delivering the Hakeem Abdul Hameed Memorial lecture.
The university had asked the former RBI Governor to speak on the topic “understanding black money” but Reddy said he changed the topic to Union-State fiscal relations. He refused to comment on the government’s recent decision on demonetisation that has shaken the country and its banking system.
In a lighter vein, Reddy said when he was asked, in the past, about whether he believed in a single objective for the central bank (of maintaining price stability), he would answer: “Yes, I believe in single objective, which is to protect the economy from the government of India.”
Reddy said India has so far been the best example of fiscal federalism anywhere in the world, with the Centre working under a framework that mandates it to limit its fiscal deficit while states are not allowed to borrow beyond their means.
Arguing against allowing too much centralisation in a country like India, he said the country witnessed healthy growth rates between 1990 and 2014, when coalition governments ruled India.
Citing importance of research work, Reddy said the country should work on improving its intellectual capital. China invests its reserves in US treasuries at 1-2 per cent return, but the US invest this borrowed money in intellectual capital to generate 15-16 per cent return, he said.