Well before the two Houses of India’s Parliament cleared the enabling legislation for the goods and services tax (GST) in early August, the government had started looking for ways to raise additional resources and compensate states for any revenue shortfall on account of the new indirect tax regime.
Sale of company stakes owned by the Specified Undertaking of the Unit Trust of India (SUUTI) is one channel the government opened up for raising money. Relaxing the fiscal deficit target for states, too, may give the central government some comfort in managing any revenue shortfall GST may entail.
The National Democratic Alliance (NDA) government aims to introduce GST across the country by subsuming various indirect taxes at the central and the state levels, including excise duty, service tax, value-added tax, entertainment tax and luxury tax starting 1 April 2017.
States, particularly those with a significant number of companies in manufacturing such as Maharashtra, Gujarat and Tamil Nadu, are concerned that they may face a revenue loss in the initial years of implementation of GST, which is a destination-based tax that by design favours consuming rather than producing states.
To bring such states on board, the central government promised to compensate them fully for any loss in revenue they suffer in the first five years of GST’s implementation.
A committee headed by chief economic adviser Arvind Subramanian has suggested a 17-19% revenue-neutral rate (RNR), the rate at which there will be no revenue loss to the states. State governments say this is too low.
The central government said it will consider a higher rate, but is not in favour of keeping the rate too high for fear of hurting consumers and fanning inflation.
Subramanian has said that resources to compensate states need to be found elsewhere in the budget and that any revenue shortfall would be a temporary phenomenon.
“There is great fear of unknown for states, so they say they want higher rates. (But) to have (a) standard rate permanently higher because of a temporary thing doesn’t seem to be good policy,” Subramanian told the Indian Express last week.
There is no estimate of the compensation that will need to be paid to states. The sum will be determined by the list of products exempted from GST, the revenue threshold below which traders will be spared from the tax and the GST rate itself.
Both the centre and states will be entering uncharted territory once GST comes into force, a government official said on condition of anonymity. “We have already made some arrangements for some additional resources. We need to be prepared for any eventuality,” added the official.
In July, ending years of hesitation, the government invited bids from bankers for the sale of minority stakes held in 51 listed and unlisted companies by SUUTI; the stakes are to be sold a period of three years.
SUUTI’s stakes in only three companies—Axis Bank Ltd (11.93% stake), ITC Ltd (11.17%), and Larsen and Toubro Ltd (8.32%)—could fetch more than Rs.60,000 crore at current prices. The government is also close to finalizing a list of state-owned companies for strategic disinvestment.
A committee set up to suggest a fiscal consolidation road map for the centre and states may offer some comfort in the form of a more flexible fiscal deficit target to help manage additional demand for resources from the exchequer.
The committee, headed by former secretary in the finance ministry and Bharatiya Janata Party member N.K. Singh, is to submit its report by 31 October.
Economic affairs secretary Shaktikanta Das said in an interview in March that the proposed fiscal deficit range should not be too wide. “Given the kind of volatility that is prevailing all around, I think the world over, governments need some political headroom to move the goal post either way,” he said. “The government should have some policy space and at the same time the band for policy adjustment should not be so large that it defeats the purpose of fiscal consolidation.”
Sources of non-tax revenue have so far proved to be an unreliable avenue for raising money and the centre needs to find additional resources to compensate states within the GST framework, said D.K. Srivastava, chief policy adviser at consulting firm EY, formerly known as Ernst & Young. “The centre can impose an additional two percentage points on central GST just to compensate states. It should be withdrawn after a period of five years once compensation period is over,” he added.