Centre-State Coordination: Revenues

1. Centre-State Coordination: Revenues Tapas K. Sen National Institute of Public Finance and Policy, New Delhi

2. -------- Part-I: Theory

3. Intergovernmental Co-ordination • Co-operative and Competitive Federalism • In the former, different tiers of government are more complementary, with spheres sharply delineated • In competitive federalism model, any level of government can do anything, provided it is done efficiently • The above applies to the specific aspect of revenue raising as well • In practice, there is a combination in most federal structures; but it is useful to keep in mind some broad guidelines to get the most out of a federal system

4. Understanding Coordination • A narrow interpretation of co-ordination would take it to mean ‘properly working together in a given situation’ • A broader view of fiscal coordination in a multi-tier fiscal structure would include several aspects including: • Formal assignments • Economic efficiency • Revenue adequacy and • Administrative considerations

5. The Three Aspects of Public Finance (Musgrave) • Resource Allocation – influencing the mix – can be done by all tiers of government • Redistribution (of income and wealth) – primary role of centre – some role of sub-national governments in implementation and feedback • Stabilization – mainly in the central domain

6. General Principles of Revenue Assignment • Though all taxes are meant to raise revenues, they are not purely for that purpose but have at least one major objective • Taxes of strongly redistributive nature, and foreign trade taxes are usually at the federal level to ensure uniformity

7. Principles of Revenue Assignment • The advantage of the ‘common market’ should not be allowed to be diluted with a ‘border tax’; tax exportation should be prevented • Unevenly endowed natural resources should be taxed centrally (many exceptions in the world) • Location specific activities and immobile tax bases can be taxed at the sub-national level • Benefit taxes and user charges can be levied at all levels

8. Other Considerations • Efficient tax administration -- information, scale economies and skill requirements – also the rarely considered taxpayer costs • Fiscal needs -- provision of service and service related tax should be at the same level • Less visible taxes, i.e., indirect taxes, politically preferred at the sub-national levels • Separating tax policy and tax administration – feasibility and desirability

9. Tax sharing • Tax base sharing – ‘de jure’ and ‘de facto’ – the concept of vertical tax harmonization • Tax revenue sharing • Balance needed between sub-national ‘accountability’ and overall efficiency considerations • Preventing inefficient tax competition

10. -------- Part-II: Practice

11. Major Revenue Categories • Direct Taxes on Income and Capital • Indirect Taxes on commodities and services • Non-Tax Revenues • Petroleum and Natural Gas • Other Minerals • Power (hydroelectricity and other)

12. Taxes on Income and Capital • Such taxes at the state level include Agricultural income tax, Profession Tax, and stamp duty • AIT in practice mostly taxes corporate plantation income, riding piggyback on corporate income taxation – results in a coordinated system by definition, but the limited coverage opens windows for evading personal income taxation • Profession tax – max. rate determined by Parliament – deductibility for income tax – potential coordination possible in assessing income of ‘hard to tax’ professional incomes • Overall system of stamp duty based on central legislation complemented by those at the state level – rates on certain instruments centrally determined, although revenue may accrue to the states – JNNURM conditionality re. stamp duty rate • Motor vehicle tax – central and state legislation – national permits Input from participants

13. Taxes on Commodities and Services • Most important area for centre-state coordination – sales tax, excise duty, service tax and GST – long awaited reform that keeps getting postponed • ‘De jure’ separation of tax base but not ‘de facto’ – significant efficiency cost of ‘tax cascading’ – can conceptually include state level taxes on services like electricity duty, tax on passenger and goods (classical type), entertainment tax, luxury tax, entry tax etc. • Stumbling blocks – CST, single or dual tax, exemptions and revenue neutral rate(s), compensation for loss, legislative and administrative authority Input from participants

14. Non-Tax Revenues • Petroleum: states get royalties (fixed from time to time)/profit petroleum (divided 50:50 between centre and states) only on onshore crude • On petrol (gasoline), diesel and natural gas, centre-state co-ordination has been missing in several instances • Other major minerals: centre fixes royalty rate, and states get the proceeds – long-standing complaints • More serious policy differences can arise on rate of exploitation – all departments of GoI may not even agree • Power: excess power has to be sold to the national grid, price negotiation is another example of necessary cooperation

15. Tax Administration • Several important issues: • Information sharing • Clearances/certificates from dept.s of a different tier • Valuation of properties: capital gains tax <--> stamp duty • Personnel issues (a major consideration for transition to GST – problems in Sri Lanka; a different model in Ethiopia) • Collection (income tax in USA and Canada) Input from participants