Karunanidhi raises concerns on proposed GST

Raising his concerns in a letter to Prime Minister Manmohan Singh and Chief Ministers of all states, Tamil Nadu Chief Minister and DMK chief M.Karunanidhi said the proposal was "highly regressive".

In the letter on June 25  Karunanidhi said proposed system has "flawed design" and its "impacts have been exaggerated while its serious drawbacks have been underestimated."

"It is mainly the articles of common consumption which are in the lower rate bands of VAT. The single revenue neutral rate will definitely be much higher than the rate now prevailing at the lower bands. In short, the incidence of taxation on the articles connsumed by the common man will rise, while the rate of tax on luxuries will fall," he contended.

He added that the proposal that all states must have a uniform rate is diametricaly contrary to the federal principals of the constitution, as it reduces the autonomy of the states.

GST, proposed by the Finance Ministry, hopes to do away with almost all indirect taxes at the Centre and states. Broadly, it will replace excise duty, service tax at the Central level and VAT at the state level.

The Centre hopes to implement the new tax regime by April one, 2010 but the states have still not agreed on the GST rate.

"At a time when decentralisation of power to lower tiers (like local bodies) is being advocated, this move will be in the opposite direction, towards centralisation of powers," Karunanidhi said contending that it would effectively reduce the states into "collecting agents" of the centre.

On the potential benefits to the states under the proposed systems, he said that there were no reliable estimates available.

"Most of the discussion on 'revenue gain' for states is based on purely speculative estimates at best, and wishful thinking at worst," he said, stressing that implementation of GST before this potential is correctly assessed (through actual collection experience) will be fiscally irresponsible.

According to him, there is a common monetary policy across the states, so fiscal policy is the only instrument available to handle regional imbalances and localised needs.

He said the GST model will bring into central excise jurisdiction lakhs of small and medium enterprises which are currently exempt.

"These SMEs-which provide the bulk of non-farm employment in the country-will face a new regulatory and compliance burden. It will also be highly unpopular with SMEs who will suddenly see a doubling of inspector raj," he contended.

Karunanidhi said that VAT experience on compensation arrangement for revenue loss to the states does not inspire confidence to go for another uniform tax regime.

"Our experience under VAT has been very bad. Bureaucratic obstacles and movement of goal posts by the Finance Ministry has given us a raw deal. Rs 4,055 crores of our claims remain outstanding," the CM said, explaining why his state is not keen on bringing GST.

"We should also remember that VAT was implemented when the economy was booming. Implementing a revenue negative new system during a slow down will pose a much higher compensation burden, at a time when the Centre has been unable to meet its fiscal deficit targets," he added.

"Besides, the idea of a fixed rate of Central GST would handcuff the Central Government's fiscal plicy," he stated, underlining that if the proposed GST had been in place, the much needed stimulus packages in which excise duties were cut twice would not have been possible.

Karunanidhi also recommended a number of measures before the GST is implemented. According to him, there should be no "uniform" rate. If necessary, there could be floor rates, leaving states fiscal flexibility and there should be at least one, and preferably two, lower rates apart from the "main" rate.

He wanted an appropriate mechanism to be evolved for compensation, independent of the finance ministry and with a say in its governance for the states.