Rubaru with RS Panel on GST Bill - A humbling experience!

As a layman i have a query.
the Centre has assured to compensate the states for 3 years and the author has suggested guaranteeing compensation for five years.GST being a destination based tax the less industrialized states will get more revenue than what they are currently collecting, this will be more or less directly proportionately to the loss of revenue of the industrialized states. The centre is not going to take back the excess revenue that will accrue to the less industrialized states as a result of GST and they also undertake to compensate the loss of revenue of the industrialized states. How does the centre intend to bridge this gap. Will we see an increase in the non cenvatable 1 per cent origin state tax which if true will bring us back to where we started. In fact it could be worse as the total tax paid by the common could see serious escalation.

rajeev jain 28/07/2015

 

Thank you, Mr.Rajeev Jain for your two queries. My response is given below:

As for compensation, as I explained at Para7 of my piece, the Centre had agreed for a tapered compensation scheme for five ( and not three) years- 100% compensation for first three years, 75% compensation for the fourth year, and 50% compensation for the fifth year. It's my sincere belief that for the reasons explained in that Para7, there will be so much of tax buoyancy after it settles down in 2 to 3 years, that there will be no need for compensation after 3 years since there will be no loss of revenue by the States.

On your question about loss of revenue by the predominantly industrialised States, I have explained the equity factor embedded in the Destination Based GST scheme at Para 9. The less industrialised states will get more revenue, which would be spent on infrastructure and power. That will attract industries in those states as well, which in turn would lead to more growth in that state. The origin States will loose some revenue. However their share of StateGST for goods consumed in their own State will remain. Moreover, they will also receive revenue( StateGST) for the raw materials, components needed for their industries in their State, which would have come from other origin States. Of course, that amount will be less. The Centre has agreed to compensate for the balance. The Centre's available sources of revenue will be good enough to take care of that . There won't be any need to raise extra revenue by raising the GST rates. Besides, it should also be kept in mind that tax is only one (of course the main) source of revenue.

In continuation:

The other factors of growth for the States are industry, infrastructure, employment etc. These won't be effected by the destination based tax scheme.

In light of what has been explained above, I do not see any possibility of increasing the rate of extra one percent origin tax, which itself is distortionary and retrograde, as explained at Para 8 of my piece.

If you have any other query, you are welcome. Thanks for your attention.

Sumit Dutt Majumder 28/07/2015