DNA Money's quick analysis of three formulas compared with 14% reveals outgo from Centre for making good losses of losing states would be the lowest
Looks like the 14% annual growth rate over the 2015-16 value added tax (VAT) revenue base assumed for compensation to states losing revenue due to goods and services tax (GST) will bring down the amount required by the central government to make good state losses.
At least, that is what DNA Money's quick analysis of the three formulae for compensation compared with the one picked up by the GST Council, which met for two days last week, throws up. For instance, if you take the average of three best years of the last five years formula, then 23 states out of the 27 states earn more than 14% with highest being West Bengal at 38.17%.
And so, if these states would have earned below that three-best-years average growth rate, the government would have had to pay them for the difference. This method of computing compensation has only four states that have growth rate below 14% - Andhra Pradesh (13.42%), Manipur (12.40%), Punjab (11.86%) and Sikkim (12.49%).
The average of outlier (best and worst) years of the last five years also has 15 of all states earning more than 14% with highest revenue growth rate of 28.86% for Arunachal Pradesh. As per this formula, Andhra Pradesh's earning is negative at -2.51%. So, it may get a big share of compensation from the Centre if its growth is below 14%. Last fiscal, its revenue collection contracted by 3.32%. A year before that it had shrunk by 19.8%.
Finally, if the last fiscal year – 2015-16 – had been taken as reference for yearly revenue growth rate, then 14 states would have fallen in the bracket of revenue growth rate of higher than 14% with West Bengal registering the highest growth of 43.3% and Sikkim a negative growth of -15.14% last fiscal.
Here, it may be noted that the state revenue number that DNA Money has used for arriving at annual growth rate may include taxes from alcoholic beverages and petrol and petroleum goods. These are products that have been kept out of GST. Also, some of the charges like stamp duty, electricity duty and others are not included in the unified indirect tax.
M S Mani, senior director, indirect tax, Deloitte India, said a "well designed" GST framework may give such a tax buoyancy to the states that the Centre may not have to compensate any state for losses on account of the rollout of the proposed new indirect tax.
"The states would be getting a share of existing excise on manufacturing and service tax, which are currently going only to the Centre. Exemptions or tax breaks under GST would also be lower than what we have today. This will broaden their tax base," he said.
praveena.sharma@dnaindia.net
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