Merge cess and surcharge with basic rates of tax: Tamil Nadu Finance Minister tells Centre

Contending that the increased levy of cesses and surcharges which do not form part of the divisible pool of taxes has “adversely affected” the transfer of resources to states, Tamil Nadu on Thursday nudged the Centre to merge cess and surcharge into basic rates of tax to enable states to receive their “legitimate share in devolution.

In his speech at a meeting organised by Union Finance Minister Nirmala Sitharaman seeking suggestions for the 2022-2023 Budget, Finance Minister P T R Palanivel Thiaga Rajan demanded that the period of compensation for GST introduction be extended by at least two years beyond June 2022 and release of the pending compensation of Rs. 16,725 crores for the state.

Launching of a comprehensive revival package for MSMEs including concessional credit, loan moratorium and deferment of statutory dues, roll-back the increase in the rate of tax from 5 per cent to 12 per cent for textile and apparel sector, and immediate intervention in controlling the rising prices of steel, copper, aluminium, coke, brass and cotton yarn are some of the key demands put forth by Thiaga Rajan, a former top banker.

Merge cess and surcharge

He also demanded the formulation of a policy to compensate the state government if any Central public sector undertaking (PSU) for which the state had given lands for free or at concessional rate is privatized. This could be done through payment of land cost at current market value or through an equivalent equity stake in the new entity, Rajan said.

On the Vehicle Scrappage Policy 2021, Thiaga Rajan asked the Union Government to contribute financially for promoting scrappage of vehicles such as a rebate on road tax, and incentives for the establishment of scrapping centres, while opining that mega industrial park projects be given to states based on their competitive advantages and the existing ecosystem to support such industries.

The increased levy of cesses and surcharges, which do not form part of the divisible pool of taxes, has adversely affected the transfer of resources to the states, Thiaga Rajan said, adding that cesses and surcharges as a proportion of the Gross Tax Revenue of the Centre have almost tripled from 6.26 per cent in 2010-11 to 19.9 per cent in 2020-21.

“In effect, States are deprived of a share in approximately 20 per cent of the revenue collected by the Union. If these taxes were added to the divisible pool, the states would have obtained an additional transfer of approximately Rs. 1.5 lakh crores as their share from the pool of central taxes in FY 2021-22,” the Finance Minister said.

Extend GST compensation by at least two years

As a consequence of this realignment, he said, the ratio of Grants-in-aid to share in central taxes has increased from 62.67 per cent in 2010-11 to 130.7 per cent in 2020-21 for Tamil Nadu.

“While the share in taxes is a legitimate right and provides the State with the autonomy to cater to local needs and aspirations, the grants-in-aid are discretionary and tied funds. This greatly impinges on the federal structure enshrined in the Constitution. I strongly urge the Union Government to merge the cesses and surcharges into the basic rates of tax so that the states receive their legitimate share in devolution,” Rajan added.

On GST, the Finance Minister reminded the Centre of its promise that states’ revenues will be protected during the introduction of the tax and opined that there has been a wide gap between the actual revenues realised and the protected revenues guaranteed.

“The States’ revenues are yet to recover, and considering the huge revenue shortfall that is expected, I urge the Union Government to extend the period of compensation by at least two years beyond June 2022 and also request the immediate release of the pending compensation of Rs. 16,725 crores,” he said, and demanded an announcement in the Budget speech.

He also batted for the Union Government to maintain a ratio of 60:40 between Direct taxes and Indirect taxes and urged the Government to permit borrowing of 5 per cent of GSDP without any conditions for FY 2022-23.

“Going even further still, I request that the borrowing limits under the FRBM and related State Acts should be set dynamically – at 5% or higher levels during recessions (when the base GSDP is dropping, and hence the need for greater State spending is required) and below 3% during high growth periods (when the base GSDP is rising rapidly and hence State spending should be curtailed to avoid inflation),” he added.

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