No abrupt fiscal correction must be attempted in 2021-22: TN to Sitharaman

Wants borrowing limit of states to be raised to 5%, extension of period under tax loss carry forward, among other things

The Tamil Nadu Finance Minister today urged the Union Finance Ministry to take more initiatives not just to support the States, but to ensure a sustained revival of the economy. He also suggested that no abrupt fiscal correction should be attempted during 2021-22.

Ahead of the Union Budget, Tamil Nadu also suggested that the borrowing limit by States should be up to 5 per cent of GDP, called for continuation of discussions on the compensation mechanism and devolving further taxation powers on States, extension of the period under the tax loss carry forward (TLCF) scheme for auto industry and some relaxations for construction industry.

In his speech at the pre-Union Budget 2021-22 meeting, Tamil Nadu Deputy Chief Minister and Finance Minister O Panneerselvam said while the States recognise Centre's initiatives, much more needs to be done not just to support the States, but to ensure sustained revival of the economy and to protect the vulnerable sections of the population.

 

He added, permission has been accorded for additional borrowings of up to 2 per cent of GDP. While the early signs of economic revival are apparent, the finances of the State Governments will take more time to recover.

“Hence, no abrupt fiscal correction should be attempted during 2021-22. The transition back to fiscal targets should be a gradual glide path over two to three years,” he said adding that borrowing of upto 5 per cent of GDP should be permitted to all State Governments in 2021-22 as well to enable States to sustain expenditure on capital works and on Covid-19 prevention measures.

The possibility of using all measures to support growth, including the escape clause in the FRBM Act to permit the RBI to subscribe to the Central Government’s loans, should be explicitly placed on the table for consideration. This will engender confidence that the government will do what it takes to sustain growth, and thereby build the virtuous cycle, said Panneerselvam.

He added, the State Governments will need to have their revenues protected, particularly in these difficult times. Alternatives, including continuance of the compensation mechanism and devolving further taxation powers on States will have to be discussed in the GST Council in order to ensure that States are not put to hardship in 2022-23.

He urged the Union Finance Minister to address this “very crucial” issue with the urgency that it warrants and to ensure that the interests of the States are not affected.

The levy of cesses and surcharges by the Central Government deprives the States of their legitimate share of the Centre’s tax revenue. Collections by way of cesses and surcharges have increased substantially as a proportion of the Gross Tax revenue of the Centre in recent years. All such cesses and surcharges should be merged into the basic rate of tax, so that the States also receive their due share from the additional revenue, said the State Finance Minister, while urging the Center to release the arrears pertaining to the 14th Finance Commission grants at the earliest.

At present Rs 19,591.63 crore including pending GST compensation claims, arrears related to 13th and 14th Finance Commission grants to Local bodies, and pending grants for programmes is due to Tamil Nadu. 

He asked the Finance Minister to reconsider the issue and remove the amendment introduced in the Finance Act, 2013 through the Finance Act to be presented in the Parliament with the Union Budget for 2021-22 and to restore the status quo ante.

 

Large international automobile companies have made substantial investments in India and specifically in Tamil Nadu. They have requested an extension of the period under the tax loss carry forward (TLCF) scheme. At present, under the Income Tax Act, losses can be carried forward up to 8 years and adjusted against future profits. Internationally this period is 20 years or even longer.

“An extension of at least five years, especially in the light of the Covid-19 pandemic, would definitely enhance India’s competitiveness in attracting and retaining foreign investments,” said Panneerselvam.

The Government of India must urgently step into bring down raw material costs including by removing tariff and non-tariff barriers on imported raw materials, imposing a ban on export of such raw materials and ease the terms of payment with the National Small Industries Corporation for such raw materials.

Since the construction industry is a prime mover with considerable employment potential, the option of levy of GST at 5 per cent without ITC and at 12 per cent with ITC may be provided to builders, he said.