The Hindu Business Line : World Bank suggests TN to shift to VAT

THE World Bank has suggested that Tamil Nadu reform its taxation system and tax administration to enhance efficiency and revenues. It has also given a plan of a possible structure that the Government can consider.

In a report entitled `Economic growth and poverty alleviation in Tamil Nadu', it reminds the policymakers of the need to shift to a Value Added Tax system that would do away with entry tax.

It says the scope for improving tax revenue is limited because Tamil Nadu is among the highest tax revenue generating States. Also, the Constitution limits the taxation powers of States and successive Finance Commissions have cut its share in the net shareable central tax pool to 5.4 per cent in the 11th Finance Commission from 8 per cent under the Seventh.

However, there is a scope for improving the efficiency, equity and administration of the tax system.

It cites another of its own reports, Tamil Nadu: Improving Investment Climate, World Bank, 2004, to point out that the tax data shows a complex web of multiple layers of sales taxes that contribute to the shortcomings. There is risk of cascading due to imposition of multiple taxes including resale tax without a provision for offsetting input taxes.

Over 63 per cent of State's own revenue is from sales tax, entry tax, resale tax, additional tax and surcharges that impose a high tax on inputs with no rebates and boost manufacturing costs.

Entry tax on motor vehicles and goods has a negative impact on trade and investment. It hinders inter-State trade and affects the competitiveness of Tamil Nadu as an investment location.

However, an area with potential for increase is non-tax revenue that is just 7 per cent of total revenues. Tamil Nadu ranks low in non-tax revenue as compared to 14 other States.

Tamil Nadu hiked the user charges on a range of services such as bus fares, irrigation rates and water supply rates, power tariffs including on agriculture. But it reversed many of the decisions constituting a setback to cost recovery and restructuring initiatives. Future increases were bound to be politically challenging, the report said.

Revamping tax administration: The World Bank suggests that the Commercial Taxes Department move to a functional structure from the territorial system. The 323 assessment circles should be abolished and tax administration shifted to 40 district offices. The circle offices could be retained as service posts.

A Large Taxpayer Unit should be created to deal with the small number of large traders who contribute to the bulk of tax collection. Such a unit, consisting of senior and experienced tax officials, should address the compliance risks and service needs of this group.

In the short-term, a five-year tax administration reform strategy should be framed, revenue collection reporting and accountability streamlined.

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