As talks on the implementation of the Goods & Services Tax (GST) pick up steam, states are set to drive a hard bargain on compensation from the Centre for any loss of revenue to these in the new regime. A revenue-neutral rate is being worked out by the National Institute of Public Finance and Policy (NIPFP) to estimate how much each state could lose by shifting to a uniform rate in the GST regime.
A revenue-neutral rate is one at which a state would not record any gain or loss after switching to the GST. The higher a state’s revenue-neutral rate, the more would be the compensation it would seek from the Centre. For instance, if the revenue-neutral rate of a state is 15 per cent tax on the sale of goods, but the prescribed uniform rate to be levied by states under GST is 10 per cent, the state could ask the Centre to compensate it for the loss of five per cent revenue.
NIPFP, led by Govinda Rao, is likely to give its report on the revenue-neutral GST rate for each state to the empowered group of state finance ministers in a month. The Delhi-based entity, funded by the central as well as state governments, would also suggest the additional tax that could fall in states’ kitties through the levy of tax on services. Currently, these are taxed only by the Centre.
“NIPFP would work out a revenue-neutral rate for each state separately. It would look at the turnover of various commodities in each state, as well as the incremental tax likely from the tax on services. The report is expected in about a month,” said a person privy to the development.
In July 2010, the government had suggested a standard GST rate of 20 per cent (10 per cent each for the Centre and the states), 12 per cent (6+6) for goods and 16 per cent (8+8) for services. It proposed to move towards a single-rate GST of 16 per cent in three years.
Most states, however, expressed reservations over the proposed rates, saying these would record losses if the highest tax rate for states was lowered to 10 per cent. Currently, most states levy value-added tax at 12.5 per cent, while the concessional rate is about five per cent.
“The rates proposed by the Centre did not find acceptance with most states. There is a board agreement in the empowered committee that there should be two rates for goods and one for services. One-rate GST has never found favour with states,” said an official with a state taxation department.
Another official said the rates proposed by the Centre did not have any relevance now and the proposed GST council, comprising state finance ministers, would decide the revenue-neutral rate.
Finance ministry officials, however, maintained no state would lose revenue at the prescribed rates, and if some states did, the Centre would compensate these.