Finance minister Arun Jaitley will do well by taking note of the suggestions made by the Thirteenth Finance Commission in designing the framework for compensating the states for any revenue loss due to the goods and services tax (GST) to avoid the problems in handling the value added tax (VAT) regime.
With the introduction of the goods and services tax (GST) constitutional amendment Bill in the Rajya Sabha for passage by Wednesday now certain, and the Bill clearing the upper house this time looking more or less a done deal, finance minister Arun Jaitley must ensure there is no serious design flaw left in the GST framework that can derail or disturb the integrated indirect tax system.
One of the biggest challenges before him in this regard will be handling the compensation to the states in the initial five years of the GST introduction, for revenue loss due to the new regime, which seems to have been a factor behind the states agreeing for the GST.
FM Jaitley would do well by keeping in mind the ‘Grand Bargain’ suggested by the Thirteenth Finance Commission (TFC) for the GST.
The Commission suggested in its report, “Keeping the experience of the implementation of VAT in mind, we suggest that the six elements of the Grand Bargain comprise: (i) the design of the GST; (ii) its operational modalities;(iii) binding agreement between Centre and states with contingencies for change in rates and procedures; (iv) disincentives for non compliance; (v) the implementation schedule and (vi) the procedure for states to claim compensation.”
While most of these elements will obviously be part of the model GST framework, it is the compensation that can become contentious easily.
It would be critical going ahead, once the Bill is cleared and the rest of the formalities to implement GST from April 1 next year is completed, how capable the GST administrative framework is to deal with the compensation demands.
In fact, the TFC suggested the Centre to sanction a grant of Rs 50,000 crore to ensure that the ‘Grand Bargain’ is implemented effectively and any revenue loss to the states during the proposed initial five years of the GST implementation at that time, FY11 to FY15, could be compensated.
But, any compensation mechanism would also need to take into account the penalty for non-compliance.
The TFC itself recommended: “Keeping in mind the experience under VAT it may become necessary to deter violations of agreement by visiting a penalty on non-complying states. We recommend that Finance Commission’s state specific grants and the state’s share of the GST incentive grant be withheld for the period during which a state is in violation of the agreement. If a state is in violation for only part of a year, its grant should be reduced to a proportionate extent.”
This, however, will not be an easy proposition. Clearly, along with getting the Constitutional amendment Bill passed in Parliament, prime minister Narendra Modi and FM Jaitley need to also ensure that administering GST doesn’t become a difficult proposition.