Of Fiscal Prudence and GST Regime The results should be seen from macroeconomic perspective...... A series of recalcitrant columns of outbursts and consequent rebuttal appeared in GK on plan mystics, fiscal management and proposed new indirect tax regime, in popular parlance, Goods and Service Tax (GST) regime (GK, Aug, 1, 4 and 15). Being viewed through ‘colored glasses’ based on hypothetical and unrealistic assumptions pregnant with political overtones in a scenario of ensuing electoral battle in the state, the write ups have lost sight of factual content of both the state of economy and that of proposed dual structure GST regime. The basic premises, under the proposed new fiscal regime, of the common objective of centre and states is the consolidation and efficiency of indirect tax system to eliminate the cascading effect of taxation, facilitate and promote increase in revenue for both centre and states which at present harbors multiple taxes in complex structure of indecipherable system. The proposed tax reform revolve around an efficient and harmonized consumption system, a comprehensive VAT on most (if not all) goods and services replacing present dual VAT system-central VAT (replacing central excise duty) and state VAT(replacing state sales tax). Having a run of success in 140 countries, the GST regime yielded 45 percent higher revenue than anticipated in New Zealand and Canada, felt its impact on income and GDP growth. A consumption based taxation system, the proposed dual Goods and Services Tax will result in increased revenue in consumer states and under this regime, taxes on different stages of production and distribution can become a pure “pass through” and tax cost would essentially be incurred on final consumption only as a consequence. The revenue will effectively accrue to the state in which consumption takes place; hence J&K is expected to have its greater positive impact on revenue buoyancy for being a consuming state. The government of India deputed state Finance Ministers to selected European countries to make study of the GST and its operations. Originally the proposal was conceived in the year 2000 and the central government contemplated to press it into service proposal from 2010 fiscal when the announcement was made by then union Finance Minister during the year 2007-08. Consequent upon the announcement, the Empowered Committee of State Finance Ministers constituted joint working group, which thoroughly debated, interacted with experts and submitted its report in the year 2007. Since then frantic efforts, for consensus among the states, have been underway, to arrive at rational tax structure. In a write-up (15th Aug) the author claims that “GST, as a system, goes against the letter and spirit of sub-national autonomy”, despite its dual structure, centre GST and state GST. In the absence of final consensus of the provisions of indirect tax reform draft certain irritants have been continuously in debate, for example Revenue Neutral Rate (RNR) which would entail no revenue loss to both State and central of governments. The reports are that the Union Finance Minister has agreed to win over dissenting state on GST, to let states add to RNR a small margin to off-set revenue losses from subsuming entry tax and octroi within the new unified tax regime. Both tier governments work out a system wherein they assume concurrent powers of indirect taxation. Tax efficiency and effective compliance, erosion of cascading effect and final benefit to consumer (consumer welfare gains) shall far more off-set the state’s cost in terms of tax policy flexibility; hence the results have to be seen from macroeconomic perspective. The author under reference has some doubts quoted as under: “Indeed, if GST, in its present form and shape, is implemented in J&K, neither the state legislature nor the state cabinet, let alone the Finance Minister, will any longer an unfettered say on taxation under GST regime’. “..,in the proposed framework the union finance minister can shoot down any proposal coming from the state on tax rates, goods to be left out of GST. That this should happen to the most “empowered” state legislature, i.e., J&K, which has residuary powers, is an irreparable loss”. “Under the GST regime, J&K will be surrendering the exclusive authority to tax goods and services. The power to raise tax revenue is being bartered for a share in the central revenues. This, as has been proven in the past, never a good bargain. The former is autonomy the later is dependence”. What is to be windfall under the new dual structure indirect tax regime is, when the states are empowered to have their own state GST. GST is a value added tax supposed to subsume most of the indirect taxes in a unified market in fiscal federal structure, it is not only J&K alone but all other states, based on consensus in a harmonized manners, submit to GST regime. The J&K state being consumer state, hence dependent, would be maximum beneficiary in-terms of revenue realization. Looking at RBI ‘State of Finances’(BE 2012-13), the proportion of tax on commodity and services in relation to total tax revenue in J&K is lowest among cross section of selected states, e g, in case of J&K it is 54.29 percent, H.P 65.87, Gujarat 72.64, Haryana 77.10, Punjab 72.91, Tamil Nadu 72.72 percent, a proven relatively low tax base in J&K and the author can imagine the magnitude of potential “power to raise tax revenue” in J&K. The existing “exclusive authority”, assuming for a moment, does not benefit the political leadership and surrendering the authority put the state on fiscal gains, hence indirectly political and autonomy benefits. Even the states, apprehending losses, under the new law, GST Compensation Fund is created under the administrative control of GST Council. The question of who bargains whom? And who barters whom? And what is bartered? In a federal structure of sub-national authority, the common minimum program of fiscal efficiency and equity stands a consensus goal. “…in the budget of 2007-08, using the enabling provisions of Jammu and Kashmir General Sales Tax Act,1962, the Finance Minister, PDP’s T.H.Karra taxed all kinds of services”. The fact is, literally, a maiden attempt was made by the then Finance Minister, Mr T. H.Karra with whom I had a series of discussions on taxing services to augment tax revenue. No sooner the decision was taken than the affected parties made it sub-judice. Even if we have empowered position, our own people disempowered the government – a tax aversion mindset society. Presently the service tax, under the composite character, is a negligible proportion of the tax revenue and the state feels under constraint to use its own service tax provisions of Act, hence without any benefit. “In helping the J&K to retain its autonomy, Rather has been provided a window of opportunity by the report of Parliamentary Standing Committee on finance”. The bedrock of autonomy of J&K does not get eroded by creating a unified market with dual GST structure where states shall have exclusive sub-national authority on SGST with the common exempted list of goods having almost unanimous sport of Finance Ministers and a general consensus rates, exemptions, exclusions, thresholds and administrative arrangements. “…J&K state is bound to lose most heavily from imposition of GST regime, less financially, much more politically. Yet, Rather chooses to head the panel which is working to implement it across all the states”. The argument appears to be more malafide as one of the Finance Ministers has to head the empowered committee panel after Asim Dasgupta and Modi. An uninterrupted career of holding Finance portfolio with incessant experience must have been qualifications impressing upon State Finance Ministers to exercise their choice for J&K FM to head the panel, an opportunity for J&K state to articulate its view for safeguarding of state’s interests in general and that of J&K state in particular. Besides, it is an honor which Asim Dasgupta was bestowed for being a professional Finance Minister of a powerful state. The author portrays J&K “a special taxation area is being mainstreamed through stealth” an impression as if the state exercises special provisions in the Constitution to levy taxes on goods which the other states are not entitled to by law. Ignoring the fact that out of the total tax revenue the VAT contributes 72 percent, that is, an amount not exceeding Rs 3414 crore (2011-12), while the other taxes which include taxes goods, passenger, duties on electricity and other duties on commodities which is hardly 13 percent and includes services (as composite tax). One can imagine proportion of service tax, just negligible, blown up by the author beyond proportions to characterize the state as special taxation area. As per RBI state of finances, (2012-13 BE), the VAT alone accounted for Rs. 36.35 thousand crore for Maharashtra, for Gujrat Rs.24.01 thousand crore, for Haryana Rs.14.63 crore, for Karnataka Rs.26.9 thousand crore for H.P 2.54 thousand crore, for Punjab Rs.13.52 crore and for J&K 3.27 thousand crore, while its total tax and non-tax revenue are estimated Rs.8794 crore (2012-13 RE), i.e. 9.4 percent of Maharashtra OTR or 36 percent of OTR of Punjab. Fiscal correction path and management of finances: In a sweeping misjudgment, the author passes on the state economy (GK, Aug 4), “fiscal poor management” and “…fiscal autonomy of the state has been bartered for mere Rs 1000 crore”, I can’t afford to exhaust the reader’s patience in methodological concepts, analytics and intricacies of the budget making process, rather would confine to straighten the records on fiscal prudential measures taken in hand by the state over the past few years. The government has inherited mounting revenue expenditure as legacy particularly from turbulent times of 1990s, the proposed budget 2007-08 ended up a whooping revenue deficit of Rs.2792 crore (BE) and the budget deficit Rs. 2010 crore(BE) despite segregating power budget from the main budget, wherein deficit of about Rs 1230 crore existed(estimated) . The fiscal deficit/GSD ratio was 8.5 (BE), steadily declined from 5.6 in 2010-11(actual), 4.42 in 2012-13( BE) and 3.57 in 2013-14 (BE). According to State of Finances (RBI, 2012-13), revenue receipt (RR/GSDP) average ratio for 2004-08 stood 37.9 percent and 42.7 percent in 2012-13. The government presented zero deficit budgets during the past few years. The own tax revenue (OTR) registered a substantial increase from Rs. 1689 crore (pre-actuals) to Rs 2199 crore in 207-08(BE) and Rs. 6700 crore in 2013-14 (BE), with OTR/GSDP ratio 5.8 percent in 2004-08 (RBI, average) and 7.7 percent 2012-13.The fiscal parameters reveal not only buoyancy and efficiency in commercial tax and tax administration but prudential measures ensuring better financial management. Ways and means and fiscal stress: The state has been subjected to acute fiscal stress particularly under the mode of financing temporary mismatch in its revenue and expenditure. The gap used to be met by overdraft facility by J&K Bank as historical ways and means facility followed by the state. While it helped the state to meet temporary mismatch, it created a sustained financial indiscipline. The Bank enjoyed a client of sovereign guarantee charging even 23 percent PLR (1996-97) on temporary overdraft and, on an average, the state, under the fiscal stress, would pay Rs 240 crore per annum as debt service overdraft facility. While the beauty of WAM was OD facility, a short term financial relief to government, the ugly character was the fiscal stress and perennial financial indiscipline which the state could not afford for long. The government put up a proposal to pursue fiscal correction path and projected its Rs.45000 crore special dispensation to 13th National Finance Commission that included Rs. 2300 crore OD debt of J&K Bank and compensation for opportunity cost of Indus Water Treaty. The 13th FC under special dispensation awarded Rs 1000 crore with stringent conditions. Consequent upon the above, the government managed to liquidate the entire debt, under the fiscal correction path, and pursued fiscal reforms and consolidation under FRBM. That is why, by the end of July, 2013, before Eid-ul-Fitr festival, the Finance Department could disburse about Rs. 1400 crore to get over the liabilities, a period, when J&K treasuries used to be dry. What have been bartered, in fact, are “financial indiscipline” and “fiscal stress” and not “financial autonomy” which author is portraying before the public. In a fiscal federalism, the states are empowered under SGST and subsuming of indirect taxes and would provide sub-national autonomy to states having wider tax base, but J&K state suffers a structural bottleneck in terms of ‘fiscal space’, the Finance Minister, Mr. A.R.Rather, Chairing Empowered Committee of state Finance Ministers is empowered to articulate in a better way J&K fiscal autonomy interests and assess better central revenue sharing under the proposed GST regime. The financial management reforms, prudential measures and pursuance of fiscal correction path, the state has successfully bartered its financial indiscipline and is thereby saving annually Rs. 240 crore on account of WAM debt service. The moot point is that J&K state has never been a special taxation area in the operational sense nor its constitutional autonomy is linked with proposed dual structure of GST regime, rather the state has an opportunity to articulate its views, for safeguarding its interests, while framing the rules and laws governing the proposal. Neither the present State Finance Minister, Mr A.R.Rather can be dubbed bartering the autonomy nor can the misrepresentation of facts in journalistic articulation by Mr Drabu bestow him with political fortunes in ensuring electoral battle in J&K .
Posted on: Mon, 02 Sep 2013 06:00:33 +0000
Trending Topics
Recently Viewed Topics
© 2015