Firm steps to ease the fiscal federalism tension (The Hindu)

Mains Paper 2: Polity
Prelims level: Not much
Mains level: Co-operative federalism improvement process

Context

• A “camel’s nose” is a metaphor from an old Arabian tale, to describe a situation where one permits a small entry to an outsider into one’s territory, only to be soon pushed out entirely. The fiscal relationship between the Centre and the States is fast turning into a “camel’s nose” syndrome for the States.

Gaining entry for pushing out

• The Goods and Services Tax (GST) by the Centre into the territory of taxation powers of States.
• It is now arming itself to elbow the States out entirely of its fiscal powers.

Federalism

• India is a union of States. Citizens of every State elect their government independently. The primary responsibility of such an elected government is efficient governance and accountability to its voters.
• An elected government is typically granted the powers to be able to raise revenues through taxation of its citizens and incur appropriate expenditure for their benefit.
• Over the past five years, democratically elected State governments have been stripped of almost all powers of taxation.
• There is an attempt to palm off the Centre’s expenditure obligation to the States and there is now talk of even limiting expenditure powers of the States.

The meal scheme lesson

• In 1982, the newly elected Chief Minister of Tamil Nadu, MG Ramachandran (MGR) wanted to expand the midday meal programme to all 70 lakh children across 52,000 government schools to improve student enrolment.
• This entailed an additional expenditure of ₹150 crore, which the government did not have.
• MGR decided to levy an additional sales tax on goods sold in Tamil Nadu to cough up the amount needed.
• The programme was then further expanded by successive governments under the Dravida Munnetra Kazhagam, which then catapulted Tamil Nadu’s literacy rate from 54% in 1981 to 83% in 2011.
• MGR and other Chief Ministers of Tamil Nadu did not have to rush to New Delhi to make the decision to implement a midday meal programme and impose additional sales taxes to fund it.
• It was decided and approved in Chennai. But in today’s India, MGR would have had to dash to Delhi and seek approval.

Against the fiscal federalism

• More than 80% of government’s revenues come from taxes, primarily from income tax (direct tax) and sales taxes (indirect tax).
• State governments in India do not have powers to levy income taxes.
• With GST, the Centre stuck its nose into the metaphorical indirect taxes tent of State governments.
• States lost their sole powers to levy indirect taxes.
• Instead, they depend on a GST Council to determine tax rates and revenues, in the mischievous disguise of cooperative federalism.
• A democratically elected State government in India can neither levy income tax nor sales tax. Representation without taxation, as the Americans might say.

Planned steps

• The Centre is now stretching its arms and legs to capture more. It has now proposed that there should be a permanent expenditure fund created for defence spending out of the total tax revenue pool.
• The Centre keeps 52% of the total tax revenue pool and distributes 48% to all the States and Union Territories. Instead of using its 52% share to spend on defence, the present government wants to palm off this expenditure to all the States.
• This will likely further reduce the tax revenues distributed to States for their own expenditure.
• The garb of cooperative federalism the Centre intruded into States’ taxation powers, under the garb of nationalism, it wants to further dilute the overall tax revenue pool of the States.

Powers to levy income tax

• The one tangible solution to restore this balance is to grant State governments the powers to levy income taxes.
• In large federal democracies such as the United States, State governments and even local governments have the right to levy income taxes.
• It is imperative that democratically elected State governments are given powers to raise revenues and incur expenditure in accordance with each State’s needs and priorities.
• It is foolhardy to think that a council in Delhi can determine all revenues and the expenditure of each State.
• There is a new report of the direct tax code that has been submitted to the Finance Minister recently.
• The time is now appropriate to amend the Constitution to grant States the powers to levy income taxes as they deem fit.

Conclusion

• The biggest of them is perhaps its inability to make a distinction between unity and uniformity.
• Uniformity is not an essential condition for unity. On the contrary, a celebration of plurality may foster greater unity in a nation such as ours.
• The days of imperialistic London are over. It is the era of Gandhinagar, Chennai, Lucknow and Kolkata.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) “Global Cooling Prize” is an initiative launched by
(a) The Intergovernmental panel on Climate Change
(b) The UNEP Secretariat
(c) The UNFCCC Secretariat
(d) Rocky Mountain Institute (RMI)

Ans: D
Mains Questions:
Q.1) The Centre should not confuse uniformity for unity and must grant States the powers to levy direct taxes. Critically examine the statement.