FinCom puts rider on GST compensation

The Thirteenth Finance Commission has recommended that states should be given the compensation for introduction of the goods and service tax (GST) only when the tax model is free of distortions and too many exemptions.

The central government plans to have a compensation mechanism in place for states, which report a loss of revenue after the proposed rollout of GST from April 1.

The commission’s report, which was submitted to the President, had proposed a Rs 50,000-crore kitty for the compensation. The Commission’s recommendations cover a five-year period beginning April 2010. Its main recommendations include a higher devolution of one percentage point of tax revenue to the states. At present, 30.5 per cent of the central tax revenues are transferred to states based on the recommendations of Twelfth Finance Commission.
 

RECOMMENDATIONS

* Higher devolution of tax revenue to states

* More central assistance to states for increasing forest cover

* Rs 50,000 cr compensation for states in case of loss of revenue after GST

* Compensation only if GST is without much too many exemptions

* Fiscal consolidation target for terminal year of 2014-15

Besides, an incentive mechanism for increased forest cover and a fiscal consolidation target for the terminal year of 2014-15, instead of an annual target, have also been proposed.

Senior officials told Business Standard that many members of the commission were of the view that there might be no need for compensation if the concept of a “flawless” GST was introduced, as proposed by a taskforce of the commission last month.

The taskforce had recommended a combined rate of 12 per cent GST comprising 5 per cent central GST and 7 per cent state GST on all goods and service except five specific categories.

The report has recommended a zero rate for exports though it does not favour any special dispensation for the special economic zones. For inter-state transactions, the taskforce recommended a zero-rated structure through adoption of the modified bank model.

The list of exemption included public services of Union, state and local governments, service transaction between an employer and employee, unprocessed food articles sold under the public distribution system, educational and health services provided by non-government schools, college and agencies. However, public services will not include railways, post and telegraph, services and products provided by other commercial departments and public sector enterprises, banks, insurance, health and education services.

The taskforce favoured doing away with area-based exemption and replacing it with direct investment-linked cash subsidy in case the government wants to support industry for balanced regional development.