Panel willing to compensate states on GST loss

Wants to bring realty, rlys and construction under tax ambit.

The Thirteenth Finance Commission (TFC) is thinking of compensating states for any revenue loss from implementing the proposed GST from April 1, 2010. At the same time, it is in favour of including construction, real estate and railways under GST. TFC will soon give its recommendations on distribution of tax revenues between the Centre and states for the five years starting April 1, 2010, coinciding with pan-India tax’s proposed introduction.

“It is possible some states may want assurances that existing revenues will be protected when they implement GST,” said Vijay Kelkar, chairman of the TFC. The Commission, he said, is willing to consider providing for compensation to advance the implementation of a “flawless” GST.

Kelkar defined “flawless GST” as one that will subsume all the major state level taxes, use a single rate, allow for only essential exemptions and eliminate all barriers to trade. At a recent meeting of state finance ministers with Pranab Mukherjee, states have asked for compensation on any revenue loss from implementing GST for a period of at least five years.

In a seminar organised by Assocham, Kelkar also disclosed that an internal calculation has estimated that a revenue neutral rate will be substantially below the combined central and state rates. TFC calculated by using data from 1.8 million business entities for the year 2007-08. But he did not disclose the revenue neutral rate, the one at which revenue from GST would be same as taxes collected prior to implementing it.

UNDER GST AMBIT
Kelkar also favoured bringing in construction and real estate activities under the ambit of a GST, arguing it would generate revenues for government, accelerate housing and construction, and provide dwelling units to large masses on reasonable prices. “The present piecemeal taxation of this sector encourages perverse incentives. Raw material is charged Cenvat, the works contract is charged VAT and stamp duty is levied on the sale. With no provision of input tax credit in place, there is little incentive to record such transactions either at the construction stage or at the sale stage at their correct value. This leads to substantial loss of tax revenues and fuels the parallel economy,” Kelkar said.

Similarly arguing for inclusion of the rail sector under GST, he said it would bring a level playing field for the road and air transportation sectors, which compete against the railways but are subjected to taxes. “This inclusion will also ensure that all inter-state transportation of goods can be tracked through the proposed IT network,” he said.

WANTS CONTINUATION OF BORDER CHECK POSTS:
TFC is in favour of continuing the current system of having check posts at the state borders, which are often cited as the main reason for delay in transporting goods.

The reason: the commission feels the check posts help the state governments in preventing goods being shipped without paying state-level taxes.

Even as it supported the presence of check posts, TFC is in favour of joint manning by both the states, instead of having two check posts within a span of few kilometers. “The Finance Commission is prepared to support creation of such check posts if the respective state governments are willing to operate jointly,” Kelkar said.
 

VIJAY KELKAR ON GST

* Finance commission willing to consider compensation for states while implementing GST

* Internal report estimates revenue neutral rate to be lower than the combined central and state rates

* Wants inclusion of construction, housing and rail sectors under GST

* In favour of continuation of check posts at state borders, but suggests joint manning

* Convergence on threshold limit could be targeted over a period of time, rather than immediately

* Three categories of small enterprises in the GST regime

* Need for a new IT infrastructure, as existing one (TINXSYS) is not fully operational

* Suggests common dispute resolution mechanism and facility for advance rulings

THREE CATEGORIES OF SMALL ENTERPRISES IN GST
Seeking to address the concerns of small enterprises, the proposed GST will have three categories for them. Those entities below the threshold level of turnover need not register for the GST. The second category - between threshold and composition turnovers - would be given an option to pay a turnover-based tax or join the GST. And for enterprises that are above the composition turnover, they will have to join GST.