The Hindu Business Line : States resort to advance realisation of tax revenues

The attempts include persuading corporates to prepay some of their tax liabilities or outright securitisation of liabilities. Among the States that have resorted to such steps are Karnataka and Maharashtra.

The prepayments or securitisation of tax receipts that they have sought relate to concessions extended to corporates in the past by way of sales tax holidays ranging from five to 14 years.

Karnataka has been able to realise Rs 256 crore from the ONGC subsidiary, MRPL, through prepayment of the sales tax deferrals.

Karnataka had offered sales tax concessions in 1999 when MRPL had proposed long-term investments for expanding the refinery capacity and for a pipeline linkage to Bangalore for Hassan.

Sources said that the upfront realisation of the sales tax has reduced Karnataka's revenue deficit for 2003-04 from Rs 1,318.44 crore to Rs 1,060 crore. This has been showed as increased tax revenues for the last fiscal.

Yet, this advance realisation has come at a price. According to the sources, the State discounted the realisation at 6.5 per cent, or about 0.75 per cent higher than the coupons on State development loans.

Ideally, this implies that the Karnataka has paid a premium for realising the revenues upfront.

A lower discounting rate would have been far more favourable for the same though not advantageous to the corporates, whose payments would have been proportionately higher.

Technically, the prepayment does not impose any financial burden on the corporates. On the other hand, in a low interest rate regime, prepayments of taxes is favourable.

If deposited in a current account, it would not have earned any interest. Consequently, a prepayment at the highest discounting was the preferred option.

Maharashtra showed the cues for such methods of raising resources. Some time back it securitised the deferred tax receipts from Bajaj Auto, Reliance Industries and Mahindra & Mahindra to raise Rs 500 crore on a non-recourse basis.

The securitised papers were then placed with banks/financial institutions to realise the money upfront.

The end-use of the resources was identical for both Karnataka and Maharashtra.

The States have used the resources for meeting the revenue expenditure or even for prepaying high-cost liabilities.

Such methods were also necessitated by a shortfall in revenues last year, especially for States hit by droughts. These steps were also necessitated by the failure to widen the tax base.

In Karnataka, the tax to State domestic product ratio is only about six per cent, slightly higher than Bihar's.

Besides, debt service payments for bonds raised in the form of off-Budget borrowings also fell due.

Under normal circumstances, the interest/redemption payments would have been refinanced.

Under the current situation, refinancing was not possible in view of the clampdown on unrated and privately placed debt papers.

The alternative methods of raising revenue have not increased the indebtedness of the State, the sources said.