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| May 22, 2000 | ||
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| KAUTILYA New Single Tax pool In a Pro-states move, Parliament approves a new system of tax devolution By Jairam Ramesh
The Tenth Finance Commission recommended the concept of a single divisible tax pool in November 1994. P. Chidambaram announced the acceptance of this recommendation in his July 1996 budget. Discussion papers were then prepared for deliberations in the Inter-State Council which gave its green signal in July 1997. Legislation was also finalised but then the United Front government fell in November 1997. It is a sign of the changing polity that Sinha accepted this idea in his very first vote-on-account in March 1998. He has changed "gross" to "net" proceeds but that is only a technicality since the difference between the two is being made up through another transfer window. This creates a confusion that states have lost but the reality is otherwise. While the continuity should be applauded, it is a telling commentary on our decision-making processes that 46 months have elapsed between a radical budget announcement and its implementation. States will, however, not be completely happy even though their share has gone up from 27 per cent to 29 per cent. Some of them were demanding a share in excess of 40 per cent. They will also not be totally satisfied with the coverage of the pool itself. They would be unhappy that surcharges and cesses have been excluded from the sharing pool. Article 268 of the Constitution gives the power to levy certain taxes to the Central government but these are collected and retained by the states. In the interest of uniformity, these taxes have been kept out of the single pool and rightly so. Central sales tax and consignment tax have also been excluded. Indeed, both these taxes are, in themselves, undesirable as they have fragmented and distorted the domestic economy and prevented the emergence of an Indian common market. Some states have also been suggesting a constitutional amendment so that states could levy service taxes since the contribution of the services sector to their economy is approaching 50 per cent. Many of these issues will, no doubt, engage the attention of the Constitution Review Commission which should ponder over the paradox of provinces in China enjoying greater financial autonomy than in India. But what is true of the states in relation to the Centre here is equally valid for local bodies vis-a-vis the states themselves. The states should accept 29 per cent as a first milestone and move on. Their main problem is not just inadequate funds flow from the Centre. It is also true that states need urgent debt relief. Besides, it is incontestable that the Centre's Fifth Pay Commission recommendations have destroyed state finances. But their fiscal mess is largely the creation of the states themselves and arises from poor management of both tax and non-tax revenue -- enormous leakages in sales tax and state excise duty collections, unwillingness to reform power and irrigation water pricing and recover user charges and in a wholly distorted pattern of public expenditure, a significant chunk of which is consumed by salaries, pensions and interest payments. Power holds the key and if this one sector alone is reformed and run along commercial lines, between half and three-fifth of the revenue deficit of most states would vanish and more resources would become available for primary education, public health and nutrition. Some states like Orissa, Andhra Pradesh, Karnataka, Uttar Pradesh, Rajasthan and Haryana have embarked on power sector reforms. But there is still a long, long way to go. The author is secretary of the AICC's Economic Affairs Department. The views expressed here are his own. |
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 © Living Media India Ltd |
On
May 9, the Lok Sabha finally passed the 89th Amendment to the Constitution
that creates a single divisible pool of Central taxes. This is a historic
step. Till now, only income tax and Union excise duties have been shared
with and devolved to the states under articles 270 and 272 of the
Constitution. The share of states for the past 15 years or so has been 85
per cent in the case of income tax and 45 per cent for excise duties. The
buoyant taxes, that is the taxes that have shown higher rates of growth,
namely corporation tax and customs duties, have not been shared. Now these
four and some other taxes will be pooled by the Centre and 29 per cent given
to the states and Union Territories. The 29 per cent share would be made
effective from April 1, 1996 and will be reviewed every five years by
successive Finance Commissions. Historically, around 27 per cent of all
taxes of the Centre have been devolved. Thus, the states have gained. More
important than specific shares, however, is the principle that states will
share in the overall tax buoyancy. That is why Finance Minister Yashwant
Sinha has said that the bonds of "cooperative federalism" would be
strengthened with this change. Tax reforms in the country will also be
facilitated.