GST may stretch fiscal deficit targets initially

The Central government’s commitment to states to fully compensate them for any revenue lost on account of implementation of the GST is likely to stretch the Central government’s fiscal deficit targets. That this assurance would run for full five years means that the pressure on the Centre’s finances would exist in the short to medium term. Many agree that there could indeed be some hiccups in the beginning. “But I do not think that this would create any big impact on the Centre’s finances,” said Bimal Jain, Taxation expert at A2Z Taxcorp LLP. Jain based his optimism on the rise in taxation revenues that GST’s implementation would bring about. As GST is going to be an automated tax (detecting loopholes if any), it would suck-in a large part of the parallel economy into a formal one, thereby widening India’s tax base. Moreover, the incremental boost to India’s GDP by 2 percentage points that the GST is expected to trigger would improve India’s tax-GDP ratio by at least one percentage point. “That would more than compensate for any pressure on the Central government’s finances,”Jain added. India’s tax-GDP ratio is likely to improve to 11.5%.

The GST is going to be a destination-based consumption tax and, therefore, many big manufacturing states like Gujarat, Tamil Nadu, Karnataka etc. fear losing a substantial share of their taxation revenues which they had been collecting as sales tax on the goods manufactured and services rendered by them. But the powers to levy and collect taxes on inter-state movement of goods and services — called Integrated Goods & Services Tax (IGST) — would be exercised by the Central government. The IGST would be the sum total of Central as well as states’ share of taxes. That is why, analysts say, the manufacturing states wanted some kind of assured mechanism which would automatically transfer the states’ share to their kitty on a regular basis. This mechanism would be decided by the GST council which would be formed within 60 days of the enactment of GST Act.

The GST is a platform where states would be given power to exercise their influence. Analysts say that since the GST is an (phenomenal) experiment being undertaken to leverage its growth-boosting potential, it is difficult to know the exact quantum of taxation revenues that would be collected by authorities all over the country. Amid such uncertainty, the Centre’s assurance to states for fully compensating them has only boosted the spirit of co-operative federalism as espoused by Prime Minister Narendra Modi. Besides such assurance, the states would also be getting 42% out of the Central government’s share of Goods & Services Tax (CGST) as per the devolution formula recommended by the 14th Finance Commission.