Gujarat okay with any GST rate as long as losses paid: Ex-FM

Below is the transcript of Saurabh Patel's interview to CNBC-TV18's Prashant Nair and Ronojoy Banerjee. Prashant: Now it is the matter of the rate itself and everybody would be eager to know your thoughts on the matter? A: Rates will be decided by the GST Council. In the last meeting, revenue neutral rate (RNR) issue was discussed in detail among the states. States have two things, one they want to keep the rates as low as possible and second they want to have rates in such a manner by which they can have their existing tax collection also. So, this will be decided within a month or two. However I feel a rate where the lowest compensation has to be paid by the centre will be decided by the states unanimously. Ronojoy: You attended the last state finance ministers meeting on the GST and the sense that we have got is that the consensus largely was on the rate being set anywhere between 22-23 percent. In that sense, would you say that is a fair assumption to make and if you could also throw us some light in terms of what is the rate that let us say a state like Gujarat will be comfortable with because you are one of the big manufacturing states to have actually ratified the GST Bill? A: All the manufacturing states are going to want a higher RNR. So, Gujarat naturally has got a higher RNR. We are comfortable with any rate because the finance minister has assured us of a compensation mechanism in place. So, lower rates is easier for the states and the centre to implement, higher the rate it is more difficult.

At the same time if the rates are lower, the centre has to pay more compensation package to the states. So, this is a very dicey situation where a tax structure has to be decided by which the Centre also doesn't have to pay much of compensation and the states are assured of their revenues.

Gujarat and all other states manufacturing because of the higher CST revenues will lose on those counts. For example Gujarat will lose at least Rs 5000 crore per annum of CST if it is counted on 2 percent basis. If it is counted on 4 percent basis then it is going to lose Rs 10000 crore per annum. Now this amount is going to be included in the revenues which are going to be decided for the states.

Any revenue which falls below the base decided for the states that is the compensation which the centre will have to pay and that is for 5 year period. So, naturally there is going to be lot of discussions, lot of debates between the state and the centre and lot of figures are also going to come in whereby which everyone is going to give their own opinion and ideas of what the taxation structure should be. So, this is going to be most challenging thing for the GST Council in the next month or two.

Prashant: The formula for compensation -- you got the assurance that you will be fully compensated, what is the formula, by when will that be known etc, do you have any apprehensions about that, what are your thoughts on that and just one more point just the BJP ruled states they are expected to clear this fast, each of these states individually. What about the others, this is of course been through the Union Parliament, but do you think states would in most cases this will breeze through? A: One point is very that as far as revenues of the states are concerned, the opinion of all states are the same, what they were assured in 2006, when Honourable Chidambaramji came out with idea in the Budget speech, that the revenues will be protected. Accordingly, the states reduced their CST from 4 percent to 3 percent and 3 percent to 2 percent. Then because of lot of issues GST did not pass through, so automatically the CST reduction was stopped by the states and the centre, so it remained at 2 percent. Now in the existing income of all the states, there are lot of instruments which are used, say for example one is VAT revenue, number two today there is a negative list in the state of Gujarat, and so we are getting certain revenue from the negative list. Now this list goes off, so that revenue also goes off. Third, in CST we deduct 1 percent input tax credit and do not give it, there are so many such things say for example purchase taxes or the other or entry tax is there. Different states have different things. There is octroi, so every state is going to decide what their revenue should be considered. In the last empowered group of meeting it was decided that the secretary should sit together and all states should give their ideas that what should be included in deciding the compensation mechanism. Now one this mechanism is decided, then what is the loss accordingly will be formulated. I think this is a very important thing. The most important thing is all the revenues existing of all the states will be calculated. Ronojoy: As far as this issue of compensation is concerned, you have recently demitted the office, you would have done some calculation as to the kind of compensation the centre would have to give the state of Gujarat, let say if the GST rate was at 18 percent or the GST rate was at 20 percent. Can you throw us some light in terms of the kind of compensation that Gujarat will need because of this? A: I will tell you the figures given by the state government, figures given by the centre and different institutions are different. So today, the people who talk about 18 percent tax rate, they are saying that the base will be much, much wider and no compensation will have to be given. If you take a conservative estimate, then others say that you should have rate of 22-23 percent and no compensation would be given. So that is different state talks differently, different institutions talk differently, economists talk differently and hence till today we have not come up with exact revenue model by which we can say that this is the rate.

I think in next month or two, lot of discussions will take place and I am sure that the centre and the states will come up with a fair taxation structure, whereby which the centre is also not burdened to a great extent and the states will find it easier to pass on this new act very comfortably to the consumers.