The Hindu Business Line : Devolve to develop

As part of the tax reform process, a committee has recommended a slew of proposals that should lead to more equitable tax devolution between the States and the Centre. The Ashim Dasgupta Committee report comes in the wake of the proposal to phase out the Central Sales Tax and harmonise the Value Added Tax regime across the country. The CST represents a sizable portion of the revenues collected by the States. Since they will lose nearly Rs 18,000 crore every year, albeit in phases as the CST is replaced by VAT, the States have been clamouring for a fresh approach to revenue sharing.

The Committee has suggested two main platforms. One is a higher devolution of powers to levy service tax on a set of 68 more items, and to levy VAT on three additional excise duty items. The second is to get a higher share in the service tax and VAT revenues. Under the 12th Finance Commission, 30.5 per cent of the service tax collection should accrue to the States; the Dasgupta Committee has suggested an additional 20 per cent. This is the compensation package the States are seeking for the loss of CST revenue and, in turn, they have agreed to phase out the CST as per a road map laid out by the committee. Clearly, these recommendations go beyond those of the latest Finance Commission and the Centre may not look upon them with enthusiasm. But the Finance Ministry would do well to consider them favourably for strategic reasons. Increasingly, the States are being pushed to the fore of core economic reform and activity. Given the thrust of the last two Budgets on agriculture and infrastructure, both State subjects, the States must have the resources to implement the Centrally-devised schemes. Unlike Central grants that are but handouts, vertical allocation of tax revenues and powers are a more efficient way of ensuring economic performance. The proposals should, therefore, be viewed as tax-sharing agreements that devolve not simply power but also accountability.

To the extent that tax powers are devolved on a lower layer of government, the federal nature of economic activity gets a leg up. Unfortunately, devolution stops with States; the lower layers of government are neglected in the tax-sharing discussions contributing to the failure of many a development project. If the cities are dying, if villages are still backward in almost every aspect of life, the fault lies in the limited participation of local governments. A decade and a half after the 74th Amendment that provided a framework for the States to transfer some 18 functions to the urban local bodies (ULBs) and tax raising powers, those functions still vest in State governments. The States should think of devolution to lower tiers of power that are the most effective in turning policy into practice.