FEBRUARY 26, 2015

By Sumit Dutt Majumder

DURING the celebration of the Central Excise Day on the 24 th of February, Jayant Sinha, the Union Minister of State for Finance in his address to the officers- present and past, highlighted two events of utmost importance to the national economy. One that happened that very day- a sharp hike in devolution of Union taxes to the States. The other that would happen in about a year's time – introduction of the Goods and Service Tax (GST). I find the Minister's speech to be very significant. Although Sinha did not explicitly connect the two events together, there remains a strong connection between the two events. What happened in Parliament on the 24 th of February will have a positive bearing on the prospect of introduction of GST on the target date of April, 2016. I will come to that soon.

In the area of Centre - State fiscal relations, the Finance Commission plays an important role, inter alia, in recommending the States' share of Central taxes for a five- year period. The Fourteenth Finance Commission (FFC) led by Dr. Y.V. Reddy, former Governor of Reserve Bank of India in its report tabled in Parliament on the 24 th of February recommended a hike of 10 percent in devolution of Central tax revenue to States to 42 percent, compared to 32 percent recommended by the Thirteenth Finance Commission led by Dr. Vijay Kelkar. This is a major jump, given that each of the previous Finance Commissions had recommended small increases of about two percentage points in the tax share of the States. In arriving at this number, the FFC has calculated predevolution revenue deficit for the States by taking into consideration their entire revenue expenditure without making a distinction between Plan and Non – Plan transfers. The actual total transfer by Centre to the States had two components- unconditional and conditional. In the conditional category, funds were given by Centre to the States for purposes specified by Centre, and the States had little flexibility in their use. By doing away with this distinction between Plan and Non- Plan or Unconditional and Conditional, the States would have a high degree of autonomy and flexibility in the way they use these transfers. By hiking the devolution to 42 percent, the total devolution to the States will rise to 45 percent of Central tax revenues in 2015-16.

The FFC has stated in its report that 'the higher tax devolution will allow States greater autonomy in financing and designing of schemes as per their needs and requirements'. As for Centre's role, the report has stated that Centre has scope to improve its tax revenues and increase productive expenditure by raising its tax to GDP ratio, which is quite low at around 10.4 percent now. In fact, Sinha in his speech pointed out that India's tax to GDP ratio is lower than even countries much less developed than India. On a similar note, the Union Finance Minister Arun Jaitley has reportedly said that with this largest ever change in percentage of devolution, the 'States must gradually become self-sufficient; entire system of discretionary payments must end'. The Prime Minister Narendra Modi has also reportedly said in his letter to the Chief Ministers that the increase in resources given to States will give them the required freedom to tailor make development schemes to suit their needs.

In this context, Jayant Sinha told the officers during the celebration of Central Excise Day that this day would also now be remembered for the landmark event of tabling in Parliament the said FFC report. He explained that the FFC had recommended radical changes in tax devolution that would move the country towards greater fiscal federalism. The States would now have greater autonomy on revenue as well as expenditure fronts. He also hoped that this will help in radically altering the Centre – State Fiscal relations for the better. This would in turn facilitate Center's vision of cooperative and competitive federalism. Sinha could not have explained the significance of the event better.

On GST front, Sinha highlighted the Centre's resolve to introduce it in April, 2016. He urged the officers of the Central Board of Excise & Customs to accelerate its efforts in gearing up for the introduction of GST. He noted the assurance given by Kaushal Srivastav, the Chairman of the CBEC about the preparedness of the officers. Shakti Kanta Das, the Revenue Secretary reminded the officers of their important role in implementing the Central GST (CGST) and Integrated GST (IGST) for the interstate supplies. One could not miss a common thread of optimism about early introduction of GST in all the speeches on the Central Excise Day.

I've written in this column on many occasions that the prime reason for delay in introduction of GST is the trust deficit between Centre and the States. The Prime Minister and the Union Finance Minister have done a great job in bridging this trust- gap by accepting the FFC recommendations on Central Taxes Devolution to the States and tabling it in Parliament without losing time. It is in this backdrop that I wrote in the first paragraph that this single act of Modi and Jaitley would have a positive bearing on the introduction of GST. It is now sincerely hoped that the 122 nd Constitution Amendment Bill for introduction of GST sails through smoothly in this very Budget Session of the Parliament.

As for other recommendations of the FFC with respect to introduction of GST, the netizens are requested to wait for my next piece.

(The author is former Chairman, Central Board of Excise and Customs. He authored the book titled "GST in India…". He is also Consulting Editor of TIOL)