Compensation to states on GST implementation may be considered

Thirteenth Finance Commission Chairman Vijay Kelkar said today the Commission is willing to consider giving compensation to states that stand to lose out on revenues after the implementation of the proposed Goods and Services Tax (GST) from April 1, 2010.     

"It is possible that some states may want assurances that existing revenues will be protected when they implement GST," Kelkar said in an address at the FICCI National Executive Committee Meeting here on "flawless" GST for promoting growth and employment.    

"The Commission is willing to consider providing for compensation in order to advance the implementation of a 'flawless' GST," the former Finance Secretary said.     

The GST would increase employment in the manufacturing sector, Kelkar told reporters later.     

"Today, what is happening... Our tax structure is such that our manufacturing sector is highly taxed; one of the highest taxed sectors in the world today is our manufacturing sector. These taxes will come down," he said.     

Flawless GST reforms would remove the tax-induced bias against the manufacturing sector and sharply increase growth in the manufacturing output, exports and blue collar jobs.

"As you know, even a 2 per cent reduction in the cost increases profits by over 20 per cent," Kelkar said. "This will attract investments in the manufacturing sector".     

What is perhaps most attractive is the very favourable impact of a flawless GST on regions lagging behind.     

As "tax cascading" disappears, the industry would move to these regions because of the likely lower costs and thus bringing them into the growth dynamics.     

Kelkar said a possible step to expand the GST tax base would be the inclusion of the rail sector. This would be necessary if a level-playing field is to be provided to the road and air transportation sectors, which would be subjected to this tax.     

"This inclusion will also ensure that all inter-state transportation of goods can be tracked through the proposed IT network", he said.     

"The Railways themselves will benefit from this by availing input tax credit on the significant purchases made by them," he added.