Centre-State Coordination: Revenues

Tapas K. Sen

National Institute of Public Finance and Policy, New Delhi

-------- Part-I: Theory-------- Part-I: Theory

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

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

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

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

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

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

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

-------- Part-II: Practice-------- Part-II: Practice

Major Revenue Categories

Direct Taxes on Income and Capital Indirect Taxes on commodities and

services Non-Tax Revenues

Petroleum and Natural GasOther MineralsPower (hydroelectricity and other)

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

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

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

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