Which levers can TN pull to generate more revenue?

The interim Budget for 2021-22 announced by the Tamil Nadu government bore the scars of the Covid-19 pandemic – contraction in revenue, expenditure mounting due to Covid-related spending and expanding fiscal deficit. According to revised estimates for FY21, the State fiscal deficit is expected to widen to ₹96,889.97 crore amounting to 4.99 per cent of the GSDP. While the budgeted deficit for FY22 is lower at ₹84,202.39 crore, it still amounts to 3.94 per cent of GSDP.

However, Tamil Nadu is not a stranger to such dire fiscal situations. It has struggled to match a contracting revenue stream with mounting expenditure, exacerbated by political doles, in the past too. The State’s borrowing due to deficits recorded over the years has resulted in taking the outstanding debt as on March 31, 2021 to ₹4,85,502.54 crore.

Most States are caught in a similar quagmire, unable to cut back on social spending nor having the ability to charge more for the services rendered, leaving their finances in shambles. The only way out is to look for ways to increase revenue. So, what are the avenues available to the Tamil Nadu government to increase its revenue? We compared the revenue streams of Tamil Nadu with Karnataka and Maharashtra to arrive at some solutions.

Options to boost revenue

Tamil Nadu receives around 77 per cent of its revenue receipts through taxes and the rest from non-tax sources. The proportion of tax revenue is slightly higher in Tamil Nadu when compared with Karnataka and Maharashtra. However, Tamil Nadu derives around 82 per cent of tax revenue from own tax sources, almost on par with the 84 per cent share of own taxes in Maharashtra. The lower dependence on share of taxes from the Centre is good as it denotes that the State has a better control over increasing its tax revenue.

With the country still grappling with the impact of the pandemic, Tamil Nadu may not be able to increase any taxes in the immediate future. But once the effects of the pandemic wear off, there are a few areas that the State can examine to increase its revenue.

Taxes on potable alcohol

Taxes from alcohol have been Tamil Nadu’s milch cow for some time now and there seems to be room to extract more revenue from this source. The largest contribution to State’s own tax revenue (OTR) comes from sales tax/VAT on Indian-made foreign liquor (IMFL) at 32.5 per cent. This is far higher than the share of alcohol in the OTR of Karnataka (11.5 per cent) and Maharashtra (17.25 per cent).

According to KR Shanmugam, Director and Professor, Madras School of Economics. “The Tamil Nadu government handles both wholesale and retail trade of liquor (IMFL). Analysis shows that the marginal profit for wholesale and retail trade of IMFL in Tamil Nadu is very low as compared to Kerala or Karnataka. For instance, the margin for wholesale and retail trade of liquor is 0.01 per cent in Tamil Nadu as against 8 per cent and 10 per cent for wholesale trade in Kerala and Karnataka, respectively.”

While taxing retail sales of IMFL, the government has classified alcohol products into four categories — ordinary, medium, Premium 1 and Premium 2 and for each category they use different rates of taxes. But within each category there are multiple items and the government is using only one rate for all the products under a category. “There can be some more slabs or sub categories and also a differential rate can be levied on these sub-categories so that they can mobilise additional revenue,” says Prof Shanmugam.

Also Tamil Nadu levies very low excise duty on IMFL, which the government can revise to increase the tax revenues.

On petroleum products

Petroleum tax is another major area of revenue for State governments. With falling global crude oil prices on one side and higher selling price on the other, governments are making windfall gains through taxes on petroleum products. However, public finance experts point out that while other States levy sales tax on petroleum products, which includes basic price and dealer commission, Tamil Nadu levies tax only on the basic price.

“Some study says the government could be losing around ₹500-1,000 crore due to this slippage,” Prof. Shanmugam said, adding, “The State government should include dealer commission and not just tax on the base price, to increase its revenue from this source.”

Other revenue sources

Although Tamil Nadu is among the States with the highest number of vehicle registrations every year, vehicle tax revenue is relatively less as compared to other States. For instance, Tamil Nadu’s revenue from vehicle tax in FY20 stood at ₹ 6,018.63 crore, lesser than Karnataka (₹7,100 crore) and Maharashtra (₹8,599.34 crore)

Experts point out that motor vehicle tax in Tamil Nadu is very low because the rates have not been revised for more than 15 years. The average tax revenue from each vehicle in Tamil Nadu is the lowest in the country. The State can consider revising this tax higher, which is not likely to impact the poorer sections too much.

An obvious lever that most States are loath to use is taxes on electricity. Tamil Nadu scores extremely low in taxing electricity with these taxes accounting for just about one per cent of the total tax revenue. In FY20, tax revenue from electricity in Tamil Nadu stood at a mere ₹1,443.29 crore as compared to ₹9,820 crore in case of Maharashtra. “Most other States are levying 10 per cent electricity tax but Tamil Nadu is charging only ₹10 paise per unit,” Prof. Shanmugam said, adding, “the State has also been giving 100 units free electricity to every household and free power to farmers.”

Nearly, 9 per cent of Tamil Nadu’s tax revenue comes from stamp duties and registration fees. In FY20, Tamil Nadu got ₹13,123 crore from stamp and registration fees which is less than half of Maharashtra which earned ₹29,500 crore during the period. However, the stamp duties in Tamil Nadu are on par with other States and not much can be done under this head except for a small rationalisation.

The other major head of own tax revenue is SGST, but the rates here are decided by the GST Council and there is little that the Tamil Nadu government can do to increase its revenue here.

Political will needed

Revenues from non-tax sources have been historically kept at abysmal levels contributing just 1 per cent of Gross State Domestic Product (GSDP).

Besides interest from government investments, non-tax revenues predominantly include revenue earned from fees, fines, rent on social and economic services rendered by the government including education, medical and public health, family welfare and housing among others. Most States, including Tamil Nadu, are not willing to revise these fees and charges annually to reflect the growing expenses in providing these services due to political compulsions.

“Several committees have highlighted that non-tax revenues should be increased by doubling the service charges, fee, rent etc. to at least cover the cost of service,” said Prof. Shanmugam.

“While salaries and DA (Dearness Allowance) are adjusted for inflation every year, charges and fees for government services are not inflation adjusted figures. That’s the problem,” he added.

Other savings plan

In addition to these revenue streams, the government could also focus on cost savings in certain sectors. For instance, almost 10 per cent of Tamil Nadu’s total revenue is currently channelled to local body governments such as Panchayat-Raj institutions and urban bodies based on State Finance Commission Recommendation.

“In fact, Tamil Nadu is the only State that gives more compensation to local body governments,” Prof. Shanmugam said, adding, “instead, the State could allow local bodies to increase property tax or house tax to make them more self -sufficient which will help the State save a lot of money.”

Tamil Nadu’s interest receipts on investments is double that of Maharashtra at ₹5,140.23 crore in FY20. This revenue can, however, be even better if the investments are better managed.

Disinvestment of loss-making State Public Sector Enterprises (SPSEs) is another avenue for generating revenue, however, nothing seems to have worked out yet.

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