Tax contribution, sharing no more a north-south issue: Arvind Subramanian

CEA says MP, Maharashtra and Gujarat are on par with southern states, claims GST is integrating the country economically

Chief Economic Adviser to the Government of India, Arvind Subramanian, on Friday, pointed out that 14 Finance Commissions with their with their 14 ways of tax-sharing perhaps made the process of tax redistribution inconsistent and incoherent. 

He was delivering the Business Standard Lecture, If This Were The First Finance Commission, in Mumbai. 

Stating that the redistribution component of tax sharing had been rising under successive Finance Commissions, he said that the contribution to tax by the southern states has been rising, while hinterland states such as Bihar, Uttar Pradesh and Chhattisgarh were the biggest beneficiaries of tax redistribution.

Subramanian added that while there was some pressure on contributing states, this was no longer a North-South issue, as Madhya Pradesh, Maharashtra and Gujarat are on par with the southern states.

Lauding the introduction of the goods and services tax, Subramanian claimed it is GST that integrating the country economically. He added that fiscal autonomy has reduced as much for the states as it has for the Centre, as decisions have to be made together under the new tax regime.

Citing an analysis of the first one month of GST, which shows that there has been a shift in tax base to UP, the north-east and Rajasthan, while manufacturing states have seen a reduction in tax base, the CEA said that a shift in tax base towards higher consuming states will reduce the need for redistribution under the tax sharing arrangement set by the Finance Commissions.

As a share of GDP, states' own tax revenues have been declining, as states have become more reliant on external inflows, Subramanian explained.

"The redistribution pot can be expanded through simpler and parsimonious criteria," said Subramanian and explained that if one region is doing badly, there should be a fiscal mechanism for easier transfer. "We must think about how to deal with asymmmetric shocks," the CEA added.

"May be the Constitution prevents us from creating better fiscal outcome, but we must provide incentives for second and third tier states whiule breaking the low-equilibrium trap," he said.

He concluded the lecture saying: "We might need new institutional structures for some solutions, for better fiscal autonomy and redistribution outcomes. In India we are seeing incredible change and a lot of decentralisation which, for the Fifteenth Finance Commission, is really the job of the First Finance Commission."

Stating that the Fourteenth Finance Commission was the most significant as it increased devolution to states, former Dy Chairman of Planning Commission, Montek Singh Ahluwalia said, "The importance of redistribution in the Indian context should not be forgotten. There is huge income disparity in India."

He added that the interstate growth process should be more convergent than it has been so far, but in the post-liberalisation period there has mainly been a divergence.

Stating that it will take at least another year to know how GST is really working, Ahluwalia said, "We need to keep in mind that we need a growth process for states to converge faster therefore successive finance commissions should make that in-principle."

"Especially for urban centres, we should suggest to the Finance Commission that Central Government grants be made to lower levels, urban local bodies because there is very low resource mobilisation at that level," he added.

Ahluwalia said property taxation ought to lead to a visible change in the local area where the tax is collected, and must incentivise states to rational property tax rates.