As GST looms, Tamil Nadu looks at ways to keep kitty intact
Dated 12th November, 2014
A study by experts shows that Tamil Nadu stands to lose at least Rs 5,000 crore per year - around 5% of its total budget outlay - if the proposed Goods and Services Tax (GST) system, which envisages uniform tax laws across the country, is introduced. The main outcome of GST would be the effective lowering of commercial tax rates which are currently at their highest in Tamil Nadu.
Since it's a state with a wide manufacturing base, revenue loss will be substantial. The shortfall from the central sales tax (CST) pool alone will be Rs 3,500 crore annually . On Tuesday, the state commercial taxes minister, M C Sampath, raised this very point at an empowered committee meeting of state finance ministers in Delhi. Along with the loss of CST, octroi, entertainment and luxury levies and increase in exemption limits for commercial taxes, which will all subsequently come within the ambit of GST, will add up to a loss of `5,000 crore or even more.
However, experts say if the Centre were to allocate those items for which the state has strong service tax potential, such as education and health, then revenue erosion may be offset, at least partially, in the future.
As per the current plan, the loss to TN is intended to be compensated through a devolution formula of the 13th Finance Commission, which has suggested a common pool for distribution of funds to states which face an erosion in revenue after GST is rolled out. However, in the longer term, this increased dependency on the Centre has profound implications on the administration of a state run on the welfare model.
Aware of the long-term impact, the state has been seeking exemptions for liquor and petroleum products from GST as both are significant money spinners. Sales tax on liquor and fuel are second and third biggest revenue streams for TN. And going by the emerging consensus, both product categories are likely to remain on the state's list.
However, what's of greater concern to administrators is the fact that TN has a higher average tax rate as compared to what's proposed under GST. This is measured as the revenue neutral rate, the rate at which a state would not record any gain or loss after switching to the GST. For instance, if the revenueneutral rate of a state is 15% but the prescribed uniform rate to be levied by states under GST is 10%, the state could ask the Centre to compensate it for the loss of five per cent revenue. In TN's case, the gap would be more than 5%.
"Tamil Nadu will be at a loss when GST is rolled out as it is a manufacturing (product) state and also due to the loss of central sales tax (CST). Though there is no clear picture on the revenue neutral rate of GST, if the rate is going to be higher than that of Ta-mil Nadu, the state will be losing considerable revenue," said Madras School of Economics director P Shanmug am. A study by Shanmugam and D K Srivastava based on 2008-09 revenue figures estimates the loss at ` 4,440 crore.
Services are another area of concern in terms of its impact on revenues in future. "GST will also include services and allocate some services to states for levying tax. The impact on Tamil Nadu's economy will depend on the services which it gets to tax. But this may not compensate the entire loss," said Srivastava. "Services in Tamil Nadu have been growing at a lower rate than the overall services tax base. This is why the service sector GSDP of Tamil Nadu as percentage of service sector GDP (all-India) has been falling," he said.
The state may also have to consider levy of taxes on products manufactured by polluting industries such as chemicals, leather, etc to mop up additional revenue, Srivastava said, but others say it may be resented by these industries. A clearer picture on the loss and ways and means to compensate the loss will emerge only after GST is finalized.
(This article is published in The Times of India on 12th Nov,2014)