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Need not be a central monopoly

The issue of division of powers of taxation between the Centre and the States has become more contentious with the States demanding an early decision on bringing the tax on certain services to their exclusive sphere as a compensation for the likely losses from the proposed phase-out of the Central sales tax (CST) on inter-State sale of goods. Even the originally agreed schedule of phase-out of CST to facilitate progress on the State-level value added tax (VAT) has now been unsettled, with the decision announced on March 22 to set up a committee to look into the issue afresh and with the States demanding additional compensation for loss of revenue from the proposed decision to include liquefied petroleum gas (LPG) in the list of `declared goods' under the CST Act. In the course of all these developments, the case for strengthening the fiscal powers of local bodies has been left totally unaddressed.

The constitutional status that the panchayats and urban local bodies got in early 1990s did not make up for the absence of a "Local List" in the Constitution. As a result, they continue to depend almost entirely on the State Governments for devolution of funds. All that the States rightly cite in justification of devolution of taxation powers, aside from a share in Central tax and non-tax revenues, are equally applicable to local bodies. Over-centralisation of powers with the Centre for decades had undermined the standards of governance, sense of responsibility, and response to economic imperatives on the part of the States. Given that a bulk of revenue from the service tax comes from just a few highly organised and growing sectors such as telecommunications, insurance, and sharebroking, it is only appropriate that some of the other organised service sectors are left to be taxed by the States and the more unorganised sectors by the local bodies. This will also facilitate identification of assessees, reduce collection cost, and make the State Governments and local bodies more accountable in respect of providing essential services.

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