Finance Commission raises questions on exclusion of goods from GST

Remains silent on revenue-neutral rate

Acknowledging the challenges for rollout of a national goods and services tax (GST), the 14th Finance Commission has not made any key recommendation on this issue.

It has, however, raised concerns on the proposed exclusion of alcohol and tobacco from a GST. The 13th Commission had recommended these items be brought under the purview. With states reluctant to let go the revenue from these, the issue became a sticking point in negotiations with the Centre. The constitutional amendment Bill tabled in December last year had excluded alcohol and tobacco products from the design of a GST.

The 14th Commission has stated that in the long run, all goods and services should be brought under the ambit of a GST; exclusion of any is not desirable.

On estimation of a revenue-neutral rate, it has said: “There are several challenges and many unresolved issues. In the absence of clarity on the design of a GST and the final rate structure, we are unable to estimate revenue implications and quantify the amount of compensation in case of revenue loss to the states due to the introduction of GST.”  

One of the most contentious issues for the rollout of GST has been the compensation to be paid by the Centre to states. With the Commission admitting inability to determine the loss of actual revenue incurred by the states, it could raise questions on the Centre's proposed compensation model.

The Commission proposals include a specified period of GST compensation, legal status of the compensation fund and universal application of a GST regime.

On the GST compensation period, its recommendation is in line with the Union proposal. This will involve the states receiving compensation for five years, from the Centre. It recommends 100 per cent compensation be paid to states in the first, second and third years, 75 per cent compensation in the fourth year and 50 per cent in the fifth and final year.  

With the recommendations likely to be accepted, one can assume the proposed Rs 11,000 crore compensation determined by central government is likely to be transformed into a GST compensation fund. As this is likely to gain autonomous status, it will provide greater comfort to states. However, the commission is silent on the funds' operational period.

Further, it has cautioned that any distortionary origin-based taxes be avoided. This could raise questions on the proposed levy of the one per cent tax on the supply of goods and services. Industry bodies have voiced concerns on this provision, being viewed as a piecemeal arrangement to achieve consensus with states.