By giving away their constitutional ability to tax, states have bet big time on the success of the new all-India tax goods and Services Tax.

However, to guard themselves against GST failing to deliver the promised increase in revenues, states had fought long and hard to get the Centre to bring in a cess which is expected to raise about Rs. 50000 crore to be divided among states to compensate for any loss in revenues.

The problem with GST is that, the tax, like all taxes, is dependent on the economy doing will. Conceptually, the GST should broaden the tax base. The tax GDP ratio could increase to 16 per cent from the current 10 percent. However, whether this would be achieved, would depend on the next year or so.Specially on how the government and industry manage to work in tandem to smoothen the overall transaction and rate of compliance.

Reserve Bank of India (RBI) has reported that the debt-to-state GSP ratio of as many as 17 Indian states increased in the past year. The RBI report said “The consolidated finances of states has deteriorated in recent years….. information on 25 states indicates that improvement in fiscal metrics budgets by states for 2016-17 may not materialize.”

The Gross Fiscal Deficit-GDP ratio in 2015- 16 has already breached the 3 percent ceiling considered fiscally prudent for the first time since 2004-5.

The GST Bill promises that in time the GST Council will move these items into the GST fold. However, it is more than likely that states will in time realize that they do need to have some measure of financial independence. This, coupled with the need to build a financial cushion, would possibly see them working actively to retain these items of taxation in their portfolio.

Entry taxes by municipal bodies, entertainment tax levied by local bodies, stamp duties, products such as alcohol and fuels, and electricity cesses are still not covered by GST. This gives them the right to increase or decrease these taxes and thus build greater financial independence from state governments. While the reverse would be the case for states, who would be bounded by the decision of this GST Council as far as the build of their revenues in concerned.

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Courtesy: Yojana