VAT must be based on floor rate: World Bank

The World Bank report on 'State Fiscal Reforms in India: Progress and Prospects' says that the introduction of value added tax should be on the basis of floor rate rather than uniform rates to avoid loss of revenue, preserve tax autonomy and minimise the need for compensation.

The report which focuses on 16 large 'general category' states, home to 93 per cent of the country's population, says that all states should introduce VAT at the same time and should eliminate the tax on inter-state trade regardless of the introduction of VAT.

The World Bank report also says that the taxation of services should be integrated with VAT and be transferred to the various states as the ultimate goal should be a unified Centre-state VAT.

The crisis over VAT: Complete coverage

Ravi Shankar, one of the co-authors of the report, on Tuesday said that one of the report's main conclusions was that a policy of hiring restraint and real wage restraint can deliver significant fiscal gains.

"The growth in the pension bill can be contained by parametric and structural reforms, the quality of spending must be improved and subsidies should be better controlled," he said.

The report also says that the tax base of states should be increased by service taxation, adding tax administration reforms are more important than tax policy reforms.

On the institutional reforms the report suggests, making the finance commission a permanent body and the role of the planning commission be redefined. The report suggests formation of a central agency to collate and improve state-level fiscal data.

It also says that grants and loans should be de-linked, and states should be given more borrowing flexibility within firmly established aggregate caps.