Finance Commission chairman NK Singh on Monday stressed that the government must complete unfinished tax reforms to improve the woefully inadequate tax buoyancy witnessed in the past one-and-a-half years, while advocating that simple direct tax code should be implemented soon and that the GST Council ought to go to the drawing board to address compliance issues.
Singh said that the tax buoyancy should at least be 1.2-1.3 for the country. However, according to an estimate by FE, if the revenue collection trend for the April-September period holds for the entire year, the buoyancy would only be 0.2. This would be the lowest tax buoyancy recorded at least since FY14.
The buoyancy, which typically refers to the ratio of tax growth to nominal GDP growth, has been steadily declining from a high of 1.6 in FY16. However, Singh said that recent measures taken by the finance ministry would have multiplier effect in the long term.
“We need to see healthy, robust tax buoyancy for which the finance ministry has announced major initiatives, including changes in the GST compliance, which I think will have a multiplier effect. I do also believe that the fundamental changes in rates of corporate taxes, in the long run, will make India an important and more competitive investment destination,” he said at an event here.
Many states had represented to the Finance Commission that the compensation period under the GST be extended by three years. This was due to fears that dwindling GST revenue may hamper states’ constitutionally-guaranteed compensation, based on an annual 14% revenue growth.
Asked about whether the Commission has acted on states’ representation, Singh said: “The issue of compensation cess is entirely a matter in the domain of the GST Council. But the central government has already committed 14% to the state governments for the first two years of the award period to be covered by the 15th Finance Commission (FY21-25). We have factored this in our projections but the states have to improve their tax buoyancy for the subsequent three years under the guaranteed 14% rate.”
Additionally, Singh said even though the FRBM Act last year revised the fiscal deficit numbers for the medium term, its alignment with the debt trajectory for enabling the central government to reach the targetted debt-GDP ratio of 60% would be possible only if it adhered to the 3% fiscal deficit target for FY21.
“Equally, we expect all states, which have voluntarily enacted their own state-level legislation, to comply with the fiscal requirement,” he added. Unlike the Centre, states together have contained their fiscal deficit at below 3%.
The Commission, whose award period would be for five years beginning FY21, is expected to submit a report by end-November. However, its terms of reference might be amended to extend its tenure in view of the bifurcation of the erstwhile state of Jammu and Kashmir into union territories (UTs) of J&K and Ladakh. UTs are not part of the Commission’s mandate as far as the devolution of central taxes to states are concerned. But since J&K is an exception as it was a state earlier, it might require a special dispensation.
“We are uncertain of the additional time Finance Commission will need to work on the J&K and Ladakh devolution formula. I haven’t heard anything from the government as yet,” Singh said.
Source : Financial Express