The Centre is likely to announce a string of measures including a Rs. 50,000-crore compensation fund as incentives for state governments to switch to a nationwide goods and services tax (GST) regime.
The new regime, billed as the most ambitious tax reform initiative to be undertaken in the country, is aimed at removing distortions in the indirect tax framework that is currently mired in a web of levies such as excise, value added tax and service tax, besides various surcharges, octroi and cess payments.
The government is targetting to roll out GST from October 1, 2010 although contentious issues remain to be ironed out, especially on specific tax rates.
The proposed system can dramatically alter the tax administration by giving a one-shot solution to a welter of levies. However, its implementation faces political hurdles as it could rob state governments of discretionary fiscal powers that they have enjoyed for decades.
Government sources, who did not wish to be identified, indicated that the Centre is planning to set up a GST compensation fund of about Rs 50,000 crore to assure states that the Centre’s budget will help offset any revenue loss to states arising out of their migration to the new regime.
“The fund would be set up for five years, with the Centre assuring a compensation of Rs 10,000 crore every year to states for any loss in revenue,” an official said.
This fund will be administered by a council of finance ministers and will have the powers to monitor the implementation of the GST and penalise states that deviate from the agreed plan.
The intended corpus is higher than the Rs 30,000 crore corpus recommended by a task force of the 13th Finance Commission.
The panel has recommended two GST rates. The rates are yet to be firmed up.