States told to work VAT into unified tax

The Centre has asked the states to decide in a month's time, whether the proposed Value Added Tax (Vat) could be integrated with the Kelkar formula of a general goods & services tax (GST).

Adviser to finance minister, Vijay Kelkar, told a seminar organised by the National Institute of Public Finance and Policy today that the empowered committee of the state finance ministers would then evaluate the comments received from the states next month, on how the GST can be woven into the state-level Vat.

According to Kelkar, the ambitious tax reforms roadmap would also include a grand bargain by the states with the Centre on how to share the revenue from the GST.

A task force headed by Kelkar on implementation of the Fiscal Responsibility and Budget Management Act has proposed a 12 per cent tax rate on goods and services at the central level and an 8 per cent Vat rate. The task force has said that the tax proposals should be front-loaded in 2005-06.

Defending the introduction of the GST, Kelkar said "it would help states and increase their revenues." He had met the convenor of empowered committee on Vat chairman Asim Dasgupta recently to discuss the GST.

The adviser to the finance minister also warned that higher economic growth and FDI flow could not be achieved without taking up stiff fiscal reforms.

"If we want to compete in a global economy, we have no choice", he said. FDI is deterred in India because of the taxes, he added referring to China which had attracted large investments post fiscal reforms.

Tax reforms would also enable the manufacturing sector to expand, including elimination of exemptions provided to companies for setting up units in backward regions.

Kelkar also acknowledged that the task force did not stress on curtailing government spending to a great extent, as "in the back of our mind, we had the Common Minimum Programme, which rules out any sharp compression in expenditure." He said the targeted revenue hikes were modest and the actual tax revenues would be much more.

However, Kelkar faced flak from public finance specialists, including Raja Chelliah. Chelliah, who had pioneered tax reforms through his report in early nineties, said the task force had no discussion on details of reforms of revenue expenditure side of government budget, except for interest payments.