TN Finance Minister Seeks More Fiscal Federalism From Center Ahead of GST Meet

PTR questioned the cesses and surcharges imposed by the government since this revenue isn’t shared with states

Tamil Nadu Finance Minister Palanivel Thiaga Rajan

(Photo: PTR)

Tamil Nadu Finance Minister Palanivel Thiaga Rajan (PTR) on Thursday, 30 December, asked for greater fiscal autonomy for states from the Union government.

In his speech at a pre-Budget meeting, ahead of the GST Council meeting on 31 December, PTR demanded that the Union government ensure that states are given their dues soon, and for lesser interference from the Union government on how states use their revenue.

He questioned the increasing cesses being collected by the Union government, and pointed out that the ratio of grants given by the Union government to state governments for specific Union government projects has increased drastically, compared to money devolved directly to the state governments for their own projects and purposes.

PTR has also asked for several reforms to the existing GST structure to ensure that the states are not deprived of their tax share.

The Tamil Nadu government has been alleging for a while now that the current regime has been further encroaching upon fiscal rights of states, and this speech has further pushed for states rights and greater fiscal federalism.

'States deprived of share in revenue'

The Tamil Nadu Finance Minister said that the current Union government has increased its share of cesses and surcharges which has adversely affected the transfer of resources to the states.

He pointed out that cesses and surcharges as a proportion of the Gross Tax Revenue of the Union government have almost tripled from 6.26 percent in 2010-11 to 19.9 percent in 2020-21.

Cesses and surcharges go only into the Union government kitty, and are not part of the divisible pool of funds. The divisible pool is the tax money that is shared between the states, and is given to states for their direct use.

This is one of the two ways the Union government transfers money to state governments; the other way is grants-in-aid for central government projects, which cannot be used for any other purpose.

States are deprived of a share in approximately 20 percent of the revenue collected by the Union government. 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.

Palanivel Thiaga Rajan (PTR), Finance Minister, Tamil Nadu as quoted by The News Minute

“While the share in taxes is a legitimate right and provides the state 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,” PTR said, urging 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.

Pending dues

PTR highlighted that dues to the tune of Rs 17,000 crore are pending from the Union government to Tamil Nadu and demanded that the dues be released as the states are already under immense fiscal stress.

“These dues have a considerable impact on the fiscal calculations of the state which are already under severe stress due to the pandemic. I strongly urge the government to release pending dues at the earliest and make appropriate allocation in the upcoming Budget 2022-23,” he said.

He’s also asked for a rollback on increasing the GST on textiles, and for the input tax on raw material for furniture to be reduced, so that the Tamil Nadu can increase the export of furniture and compete with China and Vietnam.

Compensation for land given for Union govt projects

For the land given by the Tamil Nadu government at concessional rates and for free for Central Public Sector Undertakings and projects of the Union government, PTR said the state government be fairly compensated when these projects are privatised.

“During the privatization of such organizations, the state government should be justly compensated for the land either through payment of land cost at current market value, or through an equivalent equity stake in the new entity,” PTR said.

He also demanded that a policy be formulated to incentivise states to show more interest in projects of the Union government, which could be announced during the Budget session.

'Remove preconditions for additional borrowings'

The Union government usually sets limits on how much state governments can borrow from the market. Currently, the Union government has set an additional borrowing limit of 1 percent of the Gross State Domestic Product (GSDP) – of which half the money can only be used for power projects.

In his speech, PTR insisted that such an imposition on how the borrowed money can be used will adversely affect the state finances and its patterns of expenditure. He asked the Union government to allow the states to borrow unconditionally within the prescribed limits.

Further, in view of the expenditure incurred by states in handling the COVID-19 pandemic, PTR asked for the borrowing limit to be set dynamically at 5 percent of the GSDP for Tamil Nadu.

As the states have incurred huge expenditure to fight COVID 19 pandemic with substantial reduction in revenues, I urge the Government to permit borrowing of 5 percent 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 percent or higher levels during recessions (when the base GSDP is dropping, and hence the need for greater State spending is required) and below 3 percent during high growth periods (when the base GSDP is rising rapidly and hence State spending should be curtailed to avoid inflation)

Palanivel Thiaga Rajan (PTR), Finance Minister, Tamil Nadu as quoted by The News Minute

Remove ‘Challenge Method’ for Mega Industrial Park Projects

PTR has also asked that instead of asking states to compete on providing incentives to industries to set up mega industrial projects, the Union government should allot these projects to states depending on their existing capacities.

“The Union Government is awarding mega industrial park projects (such as Mega Textile Parks, Bulk Drug Parks, etc.) based on a challenge method, where states compete to provide fiscal incentives and other concessions to investors. This Policy creates an unhealthy competition of providing unsustainable fiscal concessions to the detriment of state finances and the public in general. It is requested that, instead, such critical projects may be given to States based on their competitive advantages and the existing ecosystem to support such industries,” he said.

Other Demands

PTR has also asked for changes in the way MSMEs are supported — with the Union government taking on a greater share of resources needed for sustaining them. He also asked for the Union government to spend more on the Thoothukudi VOC port project, and asked that SIDBI (Small Industries Development Bank of India) give funds to state financial corporations as well, and not just to nationalised banks.

(This piece was originally published in The News Minute and has been republished with permission. Please read the original story here.)