States seek compensation from revenue loss post-GST

State governments have asked the Centre to compensate for any revenue loss that may arise after implementing the Goods and Services Tax (GST) from April 2010. “It would be necessary to provide some comfort (like under the value-added tax regime) to the states by setting up a suitable mechanism to compensate them for three years,” said a government official. Though the states might lose because of providing tax credit on input, they will also gain by way of taxing services. At present, only the Centre taxes around 100 types of services. Thus, the actual losses states might incur cannot be estimated until the GST is implemented. The aim of the GST is to have one uniform tax and do away with multiple taxes like excise duty, central sales tax and services tax, so that tax administration and payment can be done easily. At present, a few taxes on finished product at the state level cannot be set off against tax paid on inputs. This leads to a cascading effect on tax. “Several assumptions will be made for deciding GST rates. It would be difficult to accurately work out how much states would lose on account of removal of cascading effect (the amount to be paid by states on account of input tax credit) and the additional revenue from services,” the source said. Post-GST, experts say manufacturing pattern might undergo a change as area-based exemption, where companies need not pay indirect taxes, will not be extended, nor new schemes will be allowed. This might result in revenue losses. In fact, suitable adjustments may have to be carried out in GST rates and other parameters after actual implementation to fine-tune the system, the Empowered Committee of State Finance Ministers had recommended. When the value added tax (VAT) was introduced in April 2005, the Centre had agreed to compensate any revenue loss 100 per cent in the first year, 75 per cent in the second year and 50 per cent in the third year. As the VAT revenue showed good growth, the central government received claims of only Rs 13,167 crore till January 31, 2008. Consultation between the Centre and states on GST has entered the final phase and the empowered committee of state finance ministers was to decide on the GST rate by the second week of February after a discussion with Prime Minister Manmohan Singh. But this may be delayed because of the PM’s surgery. – www.business-standard.com