TN’s financial fate: Filling Tax-GDP ratio gap

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Considered an emerging global market, India’s poor Tax-GDP ratio underlines the need to widen tax base for enhancing financial growth.

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henever there is a regime change, the phrase ‘empty coffers’ rings among the state subjects. A blame game would then follow between the incumbent and the predecessors over the status of public finance in the state. Tamil Nadu is no exception as both the Dravidian parties in the past were involved in the same debate.

In the year 2001, after attaining the reign, the then CM Jayalalithaa had presented a mini-budget through hiking several charges and guiding austerity measures to create healthy environment in the state finance. There was a famous quote from her which stated that 95 percent of the state revenue goes to salaries and other administrative expenses and remaining 5 percent alone was being spent on development. Following years witnessed arrest of government servants even during midnight after they entered into a prolonged strike.

What the situation at that time is nothing, but becoming bankrupt as the state’s finance was red as the indebtedness surpassed the total revenue and assets which were mortgaged with financial institutions, according to the World Bank. Somehow the situation was returned to normalcy.

Almost after a decade, the government was caught up in a similar situation and once again it was the AIADMK government which was at the saddle. The public was forced to witness another hike in services like transport and power. This repeated debt crisis in the state is a core issue to be discussed.

Dilemma of a Developed State

Tamil Nadu is listed under developed state category in India. It is one of the leading exporters having highest number of GST registration according to the recent annual Economic Survey. However, the state is witnessing huge debt burden up to the tune of Rs 3.55 lakh crore as per the 2018-19 budget. Electoral promises of freebie schemes made by both Dravidian parties build up to this state of affairs.

Moreover, appeasing state government and other corporation employees with regular wage hikes also caused huge burden on the state. The states revenue receipts faced downturn trend as per a CAG report released in the state assembly during 2016.

“The central government first let the financial devolution under proper mechanism. Then it asked states to augment their revenue sources. States should have better system for own tax resource. No doubt about it. But let the Centre be liberal in allocating finance to states.”Prof. M. Vijayabhaskar, Madras Institute of Development Studies

During the last two decades, the state had not added any new revenue source except TASMAC and fuel products. Nearly 30 per cent of the state revenue receipts are accrued through taxing on liquor sales. But the potential revenue accumulators like land/real estate, levy on temple lands and rationalization of other tax revenues are yet to be streamlined. The state has digitized land records, thus making selling and buying difficult to evade stamp duty and other charges. It has also started to map large urban conglomerations to tap more revenue. Beyond temple land records are being computed after facing severe questions from the HC. In addition it tries to reduce losses accrued through public services. Any additional taxation measure is also encountering public ire as the local entertainment tax (in addition to 18 per cent GST) has increased fare of cinema tickets up to Rs 200 in Mall Complex theatres, which received wrath of the film industry as well.

A major contention of the state is that the central government is handing over about 40 per cent out of the central taxes collected in the state. It is estimated to be at Rs 1,76,251 crore, including central transfers for the year 2018-19. The state has Rs 98,693 crore as its own revenue and estimated to reach Rs 1,12, 616 crore during the fiscal year of 2018-19.

As a developed state, it has been experiencing reduced outlays from last few finance commissions. Tamil Nadu has even been punished for its better forest coverage! This resource crunch certainly adds strain in maintaining 3 per cent SGDP (currently at 2.79 per cent) deficit allowed by the Financial Regulation Act. Related to the issue, state’s share in the newly implemented GST regime has in fact reduced the fiscal deficit, informed the Finance Minister O Panneerselvam while presenting the state budget in the assembly. Consolation is that the loss of revenue caused by the GST regime is being compensated by the centre and Rs 632 crore till February 2018.

“In the case of Tamil Nadu, GST has been really working well and we can see a pasture future. State’s objection towards lower devolution of funds is not legitimate. Because once GST is doing well they can benefit more. We can bargain for other parameters like controlling population etc, and get enough incentives towards them.” Shyam Sekar, Financial Consultant

However, the state is still an agro based economy as 21 per cent of the SDGP (2014-15) and 52 per cent of the state area is rural. Agriculture is the major employment provider with around 20 per cent next to manufacture and services sector. Though the state has registered faster industrialization revenue benefits accrued goes to central pool. Hence, the state repeatedly demands more allocation out of central direct tax revenue.

India- A lower Tax-GDP Regime

India is termed as a lower Tax-GDP regime compared to other developed markets. As an emerging market, it has merely 17.7 per cent Tax-GDP ratio and has been recommended to improve its status through widening tax base. It has also been proposed to have a 34 per cent Tax-GDP ratio to enhance growth prospects which means to double the existing ratio. Government is taking necessary steps in this direction as it has entered into double taxation avoidance treaty, introduction of GST and tracking tax evasions.

Still a larger agro based economy India is not taxing agricultural income. Recent demonetization has in fact enlarged the direct tax base with nearly 10 crore direct tax payers out of 1.3 billion population. The country has few options other than improving tax collection and simplifying tax paying procedures. Increasing tax revenues would pave the way for reducing Tax-GDP ratio in the future.