States must raise non-tax revenues

VS Krishnan | Updated on August 05, 2021

The Covid crisis has stretched State finances by impacting both GST and cess collections. This, along with the imminent end of GST compensation in July 2022, has forced States to look at other revenue options. While the discussions on public finances of both the Centre and States have been on petroleum and alcohol GST levies, States also need to look closely at their non-tax revenues which are not insignificant at around 10 per cent of States’ total revenue collection.

There is substantial difference between States’ tax revenues and non-tax revenues. Tax revenue is charged on income earned by an individual or an entity (direct tax) and on the value of transaction of goods and services (indirect tax). On the other hand, non-tax revenue is charged against services provided by the government. It also includes interest charged on loans advanced by the government for various purposes. The main components of States’ own non-tax revenues are shown in the Table.


Pricing of services

The three main administrative non-tax receipts heads — general services, social services and economic services — account for about 80 per cent of States’ own non-tax revenue. To augment additional revenues from non-tax sources, the fees/user charges for the various services provided by the State government need to be reformed.

The State must focus on meeting the cost of public services through proper pricing, wherever feasible. Services such as education and health are merit in nature and involve a degree of positive externality and, to some extent, subsidisation may be justified. The extent of subsidisation and its pattern over time need to be examined.

It is essential to understand and appraise the performance of some of the non-tax sources of States with a view to examining their trends, identifying the factors responsible for their growth or lack of growth, exploring the scope for rationalising their price structures and, thereby, improving the overall budgetary position of the States as well as efficiency in resource use.

One of the reasons States’ own revenues have been neglected is that they have not been able to create a credible State Finance Commission. According to the Constitution (Articles 243-I (1) to 243-I (4)), State Finance Commissions are, at the State level, what the Finance Commission is at the level of the Union. As originally envisaged, Finance Commissions are to make recommendations on measures to augment the Consolidated Fund of a State to supplement the resources of local governments on the basis of recommendations made by State Finance Commissions.

According to 15th Finance Commission report, most State governments did not constitute them in time and did not give due importance to strengthening this critical constitutional mechanism. Therefore, States have not got the benefit of a systematic review of their revenue position and recommendations for resource mobilisation. The State Finance Commissions need to play a much more critical role in recommending taxes assigned to municipalities and other local governments and related financial relations between the States and their municipalities.

The State Finance Commissions are not a permanent body; therefore, a lot of time goes towards getting office space, technical manpower, arranging office infrastructure and collecting data on local body finances which lead to considerable delay in filing their reports.

The State governments should strengthen the State Finance Commissions and ensure they have proper resources, adequate administrative support for their smooth functioning and are provided adequate time for carrying out the task assigned to them so as to ensure timely submission of reports to the government. A strengthened State Finance Commission would ensure that States get the benefit of appropriate distribution of resources to their Panchayati Raj institutes and also periodic recommendations for augmenting own source of revenues.

Thus, it is important that States become more proactive in raising revenues as in the times to come they will have to make substantial investments in the health and education sectors which are going to be critical for growth.

The writer is National Leader, Tax and Economic Policy Group, EY India. Contribution by: Abhinav Dani, Senior Manager, EY India

Published on August 05, 2021

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