TN Finance Minister urges Centre to extend GST compensation period by two years

With the States’ revenues yet to recover, and considering the huge revenue shortfall that is expected, Tamil Nadu Finance Minister Palanivel Thiaga Rajan urged the Centre to extend the period of GST compensation by at least two years beyond June 2022. He also requested the immediate release of pending compensation of ₹16,725 crore.

Rajan was speaking at the Union Finance Minister Nirmala Sitharaman’s pre-Budget meeting with the Finance Ministers of all States and Union Territories (with Legislature) held in Delhi on Thursday.

During the introduction of GST, the State accepted to forego its fiscal autonomy with an assurance from the Union Government that its revenues will be protected. In the last five years, there has been a wide gap between the actual revenues realised and the protected revenues guaranteed. This trend was visible even before the pandemic and the gap has increasingly widened ever since, Rajan said at the meeting.

Rise in indirect tax share

In recent years, the share of revenue collected from indirect taxes in the Gross Tax Revenue of the Centre has increased sharply and has surpassed the collections from direct taxes in 2020- 21. This is highly inequitable, as indirect taxes are regressive by their nature and disproportionately affect the poor, Rajan said.

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“I request the Union Government to maintain a ratio of 60:40 between Direct taxes and Indirect taxes,” he added.

The increased levy of cess and surcharges, which do not form part of the divisible pool of taxes, has adversely affected the transfer of resources to the States. Cesses and surcharges as a proportion of the Gross Tax Revenue of the Centre have almost tripled from 6.26 per cent in 2010-11 to 19.9 per cent in 2020-21. In effect, States are deprived of a share in approximately 20 per cent of the revenue collected by the Union. If these taxes were added to the divisible pool, the States would have obtained an additional transfer of approximately ₹1.5-lakh crore as their share from the pool of central taxes in FY22, he added.

‘Merge cesses and surcharges’

As a consequence of this realignment, the ratio of grants in-aid to share in central taxes has increased from 62.67 per cent in FY11 to 130.7 per cent in FY21 for Tamil Nadu. While the share in taxes is a legitimate right and provides the State the autonomy to cater to local needs and aspirations, the grants-in-aid are discretionary and tied funds. This greatly impinges on the federal structure enshrined in the Constitution. Rajan urged the Centre to merge the cesses and surcharges into the basic rates of tax so that the states receive their legitimate share in devolution.

In the case of Tamil Nadu, a substantial amount of dues are pending from the Union Government. For schemes shared between Centre and States, approximately ₹17,000 crore of the Union Government’s share remain to be released. Rajan urged the Centre to release the pending dues at the earliest and make appropriate allocation in the upcoming Budget 2022-23.

Limits on borrowing, funding

Rajan also requested that the borrowing limits under the FRBM and related State Acts should be set dynamically – at 5 per cent or higher levels during recessions (when the base GSDP is dropping, and hence the need for greater State spending is required) and below 3 per cent during high growth periods (when the base GSDP is rising rapidly and hence State spending should be curtailed to avoid inflation).

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The Union Finance Ministry has encouraged a restriction of one project per annum per State from a given external funding agency. Such a restriction will reduce the overall lending into India at an aggregate level, as many states will not qualify for the scale of credit that will be available to developed states with strong track records like Tamil Nadu. Rajan urged the Centre to discontinue this restriction and not disincentivise well performing states.

Rajan urged the Centre expansion of the Thoothukudi port with Outer Harbour project including dredging of upto 17 m draught be sanctioned in this Budget. He also urged the Centre to expedite the final sanction by the Cabinet Committee on Economic Affairs for Chennai Metro Rail Phase II project for a 50:50 equity share between the Tamil Nadu and Union Governments, and ensure adequate provisions are made for the same in the Budget 2022-23.

The recent decision by the GST council and the Union Government to increase the rate of tax from 5 per cent to 12 per cent for the textile and apparel sector is problematic on several counts. Rajan urged the Centre to roll-back the increase.

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