FM offers to pay states 50% of their GST loss

The government failed to take a decision on the rollout date of the new goods and service tax (GST) at a meeting between the Union finance minister Pranab Mukherjee and state finance ministers in the capital on Friday.

The meeting was scheduled for resolving the hurdles for introducing GST and fixing a realistic rollout date.

However, the FM has offered a proposal to the states for absorbing 50% of the losses likely to be incurred by them while shifting to the GST regime.

If the proposal is accepted, states would have to take a hit of roughly Rs 4,500 crore this financial year. The FM has urged the states to absorb 50% of the losses in view of the economic slowdown. The Centre’s compensation to the states will be Rs 4,500 crore to Rs 5,000 crore, as per the proposal.

Faced with a steep fiscal deficit, around 6.8% of the GDP, the Centre wants to curb expenditure.

Earlier, the government had announced April 1, 2010 as the target date for GST introduction.

But following differences between the Centre and the states (mainly BJP ruled) over the tax rates and the compensation states have sought for the loss of revenue they would have to bear due to phasing out of central sales tax (CST), the government is likely to defer the GST introduction by a year or so.

West Bengal finance minister Asim Dasgupta, who heads the empowered committee of state finance ministers on GST, said the FM has sought more time before announcing a rollout date as the government is busy with the Budget preparation right now. Later this month, the Centre and the states plan to come together again to try for a consensus on tax rates, compensation and a rollout date for GST.

As for the FM’s proposal on compensation and absorbing losses, the states would discuss the offer amongst themselves before heading into the next meeting with Mukherjee.

Dasgupta said the FM has offered that the Centre will meet 50% of the loss to be incurred by states due to reduction of CST from 3 to 2%, as way of compensation. The remaining 50% can be borne by the states.

Estimates suggest that states may lose around Rs 14,000 crore to Rs 15,000 crore in 2009-10 due to CST reduction. But, since states receive full collections from 33 services taxed by the central government, the actual losses due to CST reduction would be to the tune of Rs 9,000 crore. This is because Rs 5,000 crore will be taken care of by taxation of 33 services.And, 50% of Rs 9,000 crore, that is Rs 4,500 crore, is the hit that states will have to take.

Mukherjee had earlier indicated that GST should be introduced after proper examination and assessment and that the date of rollout was not the only important thing. The Centre and states would phase out CST for introducing the GST.

Recently, the 13th Finance Commission gave its recommendation to President Pratibha Patil. The recommendation included assessment of the impact of GST rollout on the economy.