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States deserve bigger share of GST pie
April, 18th 2017

While the central and state governments are yet to decide on apportioning of the tax revenue from the Goods and Services Tax (GST), experts felt that states deserve a bigger part of the tax pie. R Mohan and N Ramalingam of Gulati Institute of Finance and Taxation (GIFT) said the 50:50 sharing of GST would not be a fair model. Based on the analysis of the growth of both commodity taxes and Union taxes subsumed into the GST, they argue that the states should demand a bigger share while apportioning tax rates.

In their paper, 'Apportioning of tax rates between union and states under GST: Some suggestions', Mohan and Ramalingam illustrated how the Union and state governments share the tax collected on a product worth Rs 100 in a pre-GST scenario. Of the Rs 100 spent by a consumer, 26.125 is collected as taxes (which includes 10% service tax) of which Rs 11.625 goes to the Centre and Rs 14.5 goes to the state government.

However, with the implementation of GST, this ratio might change to 50:50, which in turn will affect the revenues of the state governments, they cautioned.They gave a suggestion that state's share should always be 2% higher than that of the Centre.

"Only 20.46% of central tax revenue of Central Excise and Service Tax (CGST) is incorporated in CGST, whereas 41.34% of Kerala's revenue is subsumed in state GST (other states' situation must be similar). Given the above ratio of present tax revenues getting subsumed in CGST and state GST, the tax rate should be divided in such a way that there is a higher share for the states," wrote Mohan and Ramalingam.
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Just after the implementation of VAT in Kerala in FY06, there was a significant growth in the collection of commodity taxes. According to the paper, to achieve a similar growth after the implementation of GST, the share of state must be high to maintain this growth pattern.During FY06 - FY11, the immediate five years after the implementation of VAT, the average growth rate in commodity tax VAT increased to 18.49%, in comparison with 13.88%, the average growth rate during the previous five years.

"Another justification for enhancing the state's share would be the anticipated sales tax loss from liquor sales after the recent Supreme Court verdict that banned liquor outlets on highways.This suggestion is also supported by the fact that, there are signals of slowdown in the economy and this has been reflected in central excise (non petroleum) as well as VAT collections from 2013-14.The Centre resorted to higher direct tax collections to overcome the situation, but states cannot do so," they argued.

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