The government has decided to compensate states for any revenue loss on account of the implementation of the Goods and Services Tax (GST), a move that will encourage states to go in for the new tax structure scheduled to be implemented from April 1, next year.
Admitting that some states might lose revenue under the new tax regime, highly placed sources in the Finance Ministry said, "the losses will be compensated".
GST, once implemented, will do away with most of the indirect taxes. It will have a dual structure, one rate for the centre and the other for the states.
State Finance Ministers, at a pre-budget meeting with the Finance Minister Pranab Mukherjee, had demanded that the Center should compensate states for any loss of revenue following implementation of the GST.
Although the Centre is mulling a five-year compensation programme, states are of the view that there should not be any time-frame for compensation scheme.
Under the GST structure, the tax would be collected by the states where the goods or services are consumed, and hence losses could be heavy for the producer states and the Centre would be required to compensate them for loss of revenue.
The Centre had earlier came out with a similar scheme to compensate states for loss of revenue following implementation of value added tax, which came into effect from April 1, 2005.
The compensation structure was 100 per cent in the first year, 75 per cent in the second year and 50 per cent in the third year. However, since VAT revenue showed good growth, the Centre received claims of only Rs 13,167 crore till January 31, 2008.
NCAER's Bhide said the government is likely to reduce tax on investments in housing projects and infrastructure and may issue infrastructure bonds in its efforts to put the economy back on the growth trajectory.
The global downturn has pulled down the growth of Indian economy to 6.7 per cent in the last fiscal from the high of 9 per cent in 2007-08 and 9.6 per cent in the year 2006-07.
While, during the interim Budget in February the government targeted limiting the fiscal deficit fixed to 5.5 per cent of GDP, the financial year 2008-09 saw the deficit at 6.2 per cent.
"The government is likely to give priority to the development of social, economic and agriculture sectors," economist Tushar Bhattacharya, who has worked with several industry and trade bodies pointed out.
Bhattacharya added that the fear of falling exports on the back of global slowdown continues and that the government might take steps to boost exports to the Africa and the Latin America.
Speaking about service tax, Bhide said there might be some increase in the forthcoming budget, however, Chaturvedi and Bhattacharya feel there is very little scope for any such rise.
