The Hindu : `Trade pact among States will augment ST revenue'

Online edition of India's National Newspaper
Tuesday, Mar 23, 2004

Tamil Nadu

Tamil Nadu

`Trade pact among States will augment ST revenue'

By Our Special Correspondent

CHENNAI, MARCH 22. States which suffer from the narrowness of their resource mobilisation base as a result of "structural problems" in the Constitution should enter into agreements for free flow of goods among themselves to maximise revenue from sales tax, the Economic Adviser to the Prime Minister, S.Narayan, said here today.

The taxation powers of the States were inadequate compared to their responsibilities in development of agriculture, water supply and basic education and health care and, as a result, their dependence on the Centre for financial devolution and borrowings increased, he said.

Speaking on `Fisc 2020: Long-Term Fiscal Outlook,' at the inaugural of a two-day seminar organised by the Department of Politics and Public Administration of the University of Madras and the Public Expenditure Round Table (PERT) here, Dr. Narayan said that in the past few years during which the growth rate of Central excise revenue had been declining, there was a boom in sales tax collection by the States. This showed that trade was expanding at a faster rate than manufacturing, thanks to lowering of indirect taxes, especially customs duties. However, trade flows were subject to internal barriers.

"For transporting steel from say, Bhilai to Coimbatore, for machining and sending it further to Vadodara, Gujarat, for making a final product, two entry taxes, two levies of octroi and three State sales taxes have to be paid, and three transactions have to be carried out." An "internal free trade agreement (FTA)" between States would encourage trade flows and augment sales tax revenue.

It was also advisable for States to leave areas such as electricity for development by the private sector, so that they could concentrate their resources for their primary tasks. The new Electricity Act and the law for securitisation of loans would enable "those State Electricity Boards which want to improve their finances" to do so. Also, the Centre gave substantial relief to States, facilitating a swap of costlier debts with new loans at lower rates. Another initiative needed was introduction of a sustainable contributory pension scheme in place of the "defined" pension, as done by the Centre.

As far as the Centre was concerned, food subsidies were the result of rising minimum support prices for farmers (MSP), to compensate them for the depression of the prices of agricultural produce in the world market by the subsidies given by developed countries to their farmers. Removal of food subsidies would not help the Indian economy, as long as developed countries did not agree to genuinely free trade in farm produce. Similarly, there was little scope for reduction in the outlay on internal security amid increasing population and urbanisation. Expenditure control could only come out of "non-increase in wages at the rate at which they had been rising in the past. The shock of the last Pay Commission is something several State governments have not yet recovered from".

The share of direct taxes in India in the gross domestic product (GDP) at around eight per cent was quite low compared to global standards and must be raised to around 12 per cent. In contrast, indirect taxes (on goods) were quite high and needed to be reduced for giving a boost to manufacturing and employment. Taxation of the organised sector in services and efficient collection were other ways of improving the tax: GDP ratio.

The Vice-Chancellor, S.P.Thyagarajan, released the Tamil brochure of PERT on FISC 2020, written by the chairman of the trust, K.Venkataraman, and translated by A.M.Swaminathan.

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