November 26, 2017

States may have got less than what they should have in the distribution of taxes under the Goods & Services Tax (GST) and the next finance commission or the GST council will examine the issue, former Reserve Bank of India (RBI) governor Y V Reddy said on Saturday.

“You should take the pool of indirect taxes, which are coming into the pool, and see what the amount was before. Before states were getting 60% and Centre was getting 40%,” Reddy said at a panel discussion at the Times Lit fest Delhi. “Now, it works out to be 50-50 but the Centre is foregoing the cesses. But it is also true that the residual tax power left to states is very little. The residual tax power like income tax and others left with the Centre is quite large. So in a way, this dilutes to some extent this 42% thing,” he said, adding that the states were happy with the liberal compensation scheme unveiled by the Centre.

The 14th Finance Commission, headed by Reddy, had raised the share of states in net central taxes to 42% from 32%. The government has set up the 15th Finance Commission, which will examine and recommend sharing of revenues between the Centre and states in the post-GST scenario. The commission is expected to submit its recommendations by 2020.

Reddy said the earlier precedent of taking 1971 population as the cut-off for working out needs of particular states was flawed and, therefore, the 14th Finance Commission had to move beyond it.

“The only argument in favour of continuing the 1971 was a precedent, it was bad in precedent, bad in theory, bad in practice, bad in constitutional propriety and that’s what I tried to explain,” he said. “The Constitution says every five years the commission will go into it and assess the needs. Now, how do you assess the needs and say that I take 1971 population to assess today’s needs? Every five years we are having the finance commission to assess the needs. How can I assess the needs of 2011? He said he would be surprised if the current finance commission faces any such constraints on what should be the population. “It should be the needs. For example, Kerala requires old people care. UP needs to take care of young people,” Reddy said.

Asked about Moody’s rating upgrade for India, he said: “Earlier when the rating was given usually the government took a view that they are under-rating our performance. Now we are saying they may be over-rating our performance. In either case the consensus seems to be they are not rating properly. So leave it there.”

[The Times of India]