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Does Maharashtra’s Road Tax Hike show that GST has Hurt States' Revenue

The Goods and Services Tax has resulted in the states and the Centre pooling in part of their fiscal autonomy in order to create a unified internal market. But, has it resulted in the states’ losing their ability to raise revenue to meet unexpected contingencies?

Tushar Dhara | News18.com

Updated:July 4, 2017, 5:56 PM IST
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Does Maharashtra’s Road Tax Hike show that GST has Hurt States' Revenue
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New Delhi: The Goods and Services Tax has resulted in the states and the Centre pooling in part of their fiscal autonomy in order to create a unified internal market. But, has it resulted in the states’ losing their ability to raise revenue to meet unexpected contingencies?

That question has regained primacy after Maharashtra yesterday approved a hike of 2% in vehicle registration tax. This is in addition to the 2% road safety tax that the state imposed last year. Obviously, the move is to mop up resources on account of revenue lost because of GST. The Brihanmumbai Municipal Corporation, India’s richest municipal body, used to rake in between Rs 7,000 crore to Rs 10,000 crore annually from Octroi alone, something which the state government will have to make up for now that the levy has been subsumed under GST.

However, there is something else: Maharashtra’s farm loan waiver package amounting to Rs 30,500 crore will also have to be funded by the state treasury. The revenue shortfall in Maharashtra is high because the GST shifts the tax collecting incidence from producing states to consuming states. Maharashtra is a state that stands to lose the most.

“When they worked on the revenue neutral rate and calculated which taxes to leave out and which to include in GST, no one could have known that farm loan waivers were round the corner,” Nihal Kothari, a tax lawyer who was an adviser to the Kelkar Task force on GST and an adviser to the States Finance Ministers on GST, told News18. “It remains to be seen what Punjab, UP, Maharashtra and Karnataka, which have also announced similar measures do,” Kothari said.

States agreed to let go of VAT/sales tax, central sales tax and taxes on betting/gambling while the Centre agreed to subsume excise and service tax in lieu of GST. However, the states’ fearing a loss in their ability to raise revenue refused to cede control over liquor and petroleum (two of the biggest revenue earners for states), vehicle/road tax, property tax and stamp duties.

Despite this, states are feeling the pinch of revenue shortfall, at least in the immediate term and hence resorting to raising the tax on items under their control.

Pronab Sen, a former Secretary of the Statistics and Programme Implementation Ministry agreed that GST had curtailed states financial autonomy partly, but he said that the same principal applied to the Centre as well. “That’s why the Constitution had to be amended to pave the way for GST,” Sen told News18.

The only way states can meet special contingency needs (for instance farm loan waivers or natural calamities) is to curtail expenditure, which mostly means development spending, rather than the salaries and pensions of government employees.

However, Sen disagreed that this was a blow to the notion of “One Nation One Tax”. GST has replaced a plethora of indirect taxes with a single, albeit multi-tiered rate. However, in order to protect the financial autonomy of states, which are a vital part of India’s federal structure, certain taxes were left out of the GST net.

Kothari expects the structure to get simplified in the future as rates start to converge and certain items like petroleum are brought under the ambit of the GST.

Revenue Secretary Hasmukh Adhia separately said in a briefing on Tuesday that there was nothing wrong in Maharashtra increasing the vehicle registration tax. He said the state government had the power to do it. Adhia also announced the formation of a Central Monitoring Panel comprising 15 top secretaries, who will meet every Tuesday to oversee the implementation of GST and the price situation.
(Get detailed and live results of each and every seat of the state Assemblies in Madhya Pradesh, Rajasthan, Telangana, Chhattisgarh and Mizoram to know which candidate/party is leading or trailing and to know who has won and who has lost and by what margin. Our one-of-its-kind Election Analytics Centre lets you put on the psephologist's hat. Know interesting facts and trivia about the elections. Elections = News18)
| Edited by: Ashish Yechury
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