Kelkar says GST compensation to states can exceed Rs 50k cr

In the grand bargain for implementing the goods and services tax,the Centre can even consider a compensation package for states that is higher than...

In the grand bargain for implementing the goods and services tax GST,the Centre can even consider a compensation package for states that is higher than Rs 50,000 crore,according to Vijay Kelkar,chairman of the Thirteenth Finance Commission.

If necessary,an additional sum can also be made available, he said on Wednesday in an interaction with FE . In its report tabled in Parliament in February,the TFC has suggested for states a compensation of Rs 50,000 crore to provide for the possibility their revenues may slip. But it has made it conditional on the states agreeing to introduce the GST before 2013 at a single rate,along with other features suggested by the commission.

The empowered committee of state finance ministers had demanded Rs 1 lakh crore as the compensation package for introducing the GST. However,states will not be entitled to any compensation if they adopted a model different from the one suggested by the TFC. States are expected to commence fresh talks on the GST design this month,though no date has been finalised yet. States would be the immediate beneficiaries of the GST as they are large buyers of goods and services,Kelkar said. They would save substantial taxes on these purchases. For states it is budget-positive,not even budget-neutral.

Having a GST regime with an appropriate design,which encompasses the real estate sector,would go a long way in reforming Indias indirect tax regime,said Kelkar,also the former finance secretary. The GST is an important part of Indias march towards modernisation. India is now part of the G-20. We need to resemble the guys on the high table. The GST would replace the current multitude of central and state indirect taxes,and create a common market across India for goods and services. This single biggest reform ever since the industrial de-licensing in 1991 could be worth 500 billion for India,Kelkar has estimated. He said an effective GST should make no distinction between goods and services. It should also have a common tax base,common exemption limits,compatible IT systems,and include the real estate sector. The simplest thing in the world is a single rate with no discrimination. Any exception creates discrimination.

Finance minister Pranab Mukherjee said in the Budget that he hoped to implement the GST from April 1,2011. Indirect taxes such as excise duty and additional excise duty,service tax,CVD,all surcharges and cesses,VAT,CST,luxury tax and entry tax should be subsumed in the GST,the commission said. This would lower the prices and remove distortions,besides making the tax regime simpler. The manufacturing sector is substantially overtaxed,and the GST would make it much lower,he said. On the likely revenue-neutral rate,Kelkar said,We are not concerned with the rates,which should be negotiated with the states. What is important is the design of the GST.