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With a significant 14.4 per cent jump in revenues after Value Added Tax, the Economic Survey on Monday asked states to impose proper user charges, cut losses of state PSUs, bring down interest and pension bills to reduce deficits further.
Patting states for cutting the combined fiscal deficit sharply to 3.1 per cent in 2005-06 from four per cent in 2004-05, the Survey said: "With the 12th Finance Commission's (TFC) debt consolidation and write-off scheme in place, the position might improve further."
While most of the indicators of state finances show a "somewhat improved picture," the survey presented to Parliament outlined the need to address the causative factors that was deteriorating their fiscal situation including the growing interest and pension burden, losses of state PSUs, absence of proper user charges and lack of buoyancy in taxes.
With the successful implementation of VAT by 25 states and UTs and the TFC incentive to enact FRBM legislations, it said: "The deepening of state level reforms contributed to the foundations of fiscal reform and their sustainability."
Following the TFC award, which mandates a quantum jump in grants-in-aid, the revenue deficit of states is slated to come down from 1.4 per cent of GDP to 0.7 per cent this fiscal.
However, the survey pointed out that the outstanding liabilities of states are pegged at Rs 11,52,530 crore (or 32.7 per cent of GDP) this fiscal compared to Rs 10,40,834 crore (33.3 per cent of GDP) in 2004-05.
The silver lining was the whopping 14.4 per cent increase in revenues in the first seven months of VAT introduction this fiscal.
As the Union government promised to compensate states for any revenue loss for switching over from Sales Tax regime to VAT, the Centre paid Rs Rs 1,317 crore to 8 states till January 15 as against their claims of Rs 1,674 crore.
Trends suggest that 2005-06 compensation liability will be contained within estimates, the survey said. To reap the benefits of a uniform tax regime, the Survey called the remaining eight states and UTs to implement VAT at the earliest to achieve a common market for goods.
Though government has already decided to phase out Central Sales Tax (CST) due to its inconsistency with the concept of VAT, the Survey said it is essential to put in place a system of information exchange between states (TINXSYS).
Phasing out of CST also involves the critical issue of adequately compensating states, particularly developed states who generate a lot of revenue through inter-state sales.
Given that the total CST collection was Rs 15,100 crore in 2004-05 and this revenue will be lost if CST is phased out, states are insisting on a compensation mechanism on a permanent basis through alternative taxation powers.
At present, the Empowered Committee is deliberating on this issue and the government will take a decision after the Committee submits its final recommendation.