Addressing a conference organised by industry chamber Assocham,TFC chairperson Vijay Kelkar stated that a recent study on the impact of GST says that India could gain as much as $15 billion annually once the GST is in place. “Discounting these flows at a modest 3 per cent per annum, the present value of the GST works out to about half a trillion dollars,” he said.

Finance minister Pranab Mukherjee is also expected to lay a roadmap for the launch of the ambitious tax reform in his budget speech next Monday. The regime is expected to kick in from April 1, 2010.

Talking about deliberations within the empowered committee of state finance ministers, Kelkar said that there appears to be an agreement that the best option would be a bare minimum number of rates, at best two, preferably one. “We assume that a single rate structure will find favour with a very limited set of exemptions available for basic food grains, basic education and health services. This single rate will ensure low compliance costs and obviate classification disputes,” he said.

Kelkar also pointed out that preliminary calculations by the task force indicate that the revenue neutral rate of GST could be substantially lower than the combined central and state rates. This analysis, he said, was based on data from about 18.25 lakh business entities for 2007-08.

The TFC chairman also suggested that activities such as housing, construction and railways be included in GST to increase the tax base and enhance collections. “I would urge that the construction and housing sectors be included in the GST tax base, either immediately or during a subsequent phase,” he said. The reason for this is that the construction sector is a significant contributor to the national economy and housing expenditure dominates personal consumption expenditure.

Kelkar also made a case suggesting that the rail sector could be included under the GST umbrella to bring about significant tax gains and widen the tax net so as to keep the overall GST rate low. The inclusion of the rail sector in the tax regime which will do away with most of the indirect taxes should be done if the government wants to provide a level playing field to road and air transportation sector. This will have the added benefit of ensuring that all inter-state transportation of goods can be tracked through the proposed information technology (IT) network, Kelkar said.

The chairman also suggested incentives for states that co-operate and co-ordinate to streamline the procedure for implementing GST on the ground. He cited the case of check posts, which could be combined by two states on their borders to monitor outgoing and incoming goods.

“It may be difficult to eliminate check posts given the concerns of state governments which may extend beyond collection of taxes and movement of goods to vehicle fitness examination, prevention of trafficking, collection of local cesses, etc. The Finance Commission is prepared to support creation of such check posts if the respective state governments are willing to operate jointly,” Kelkar said.

“It is possible that some states may want assurances that existing revenues will be protected when they implement GST. The Commission is willing to consider providing for compensation in order to advance the implementation of a flawless GST,” he added.

Later in the day, finance ministry sources said that the government may compensate states for any revenue loss on account of the implementation of the GST to encourage states to adopt the new tax structure. Although the Centre is mulling a five-year compensation programme, states are of the view that there should not be any time-frame for compensation scheme.