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Should Centre share tax collection pie with states?

By BS Reporters
July 26, 2018 09:00 IST
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'All of us have believed in decentralisation. You may not like property taxation, neither do I. My solution is that the Centre does the tax collection, but we can give a matching grant instead of redistribution,' says the outgoing CEA, Arvind Subramanian.

Local bodies and the states might not have adequate resources to collect property taxes and so it should be left to the Centre to collect those revenues, argued Chief Economic Advisor Arvind Subramanian in the recently held Business Standard Lecture in Mumbai.


Subramanian was making his points at a panel discussion after his lecture on India’s cooperative federalism between the states and Centre.

Montek Singh Ahluwalia, former vice-chairman of the erstwhile Planning Commission, challenged the view stating that it might ultimately lead to chaos as taxes are often finalised taking into account many political considerations and realities closer to the ground.

The CEA’s solution was to give back some grants to the states, in line with the tax collected.

“All of us have believed in decentralisation. You may not like property taxation, neither do I. My solution is that the Centre does the tax collection, but we can give a matching grant instead of redistribution,” Subramanian said.

According to the CEA, the question of hurting the autonomy of states don’t matter much in this context, because “they are not using their existing autonomy” anyway.

Still, in the last 40-50 years “political power, de facto and de jure, has been going to the states,” Subramanian said.

While states do not have enough capacity to collect and levy taxes, and control expenditure, the Centre should step in, was the CEA’s argument.

To this, the chairman of 14th Finance Commission and former Reserve Bank of India governor Y V Reddy, who was present on the occasion, retorted saying that the Centre was not faring either in Union territories that they control.

So, it is not fair to criticise states alone as each state has different compulsions and expenditure requirements.

“Please look at empirical points. States are irresponsible, their revenue deficit is high, but look at the reasons…. Please look at how the taxes are collected in Union territories. Which programme has the Centre implemented better in the Union territories than in the states?” Reddy asked.

Montek Singh Ahluwalia said the terms of reference for 14th Finance Commission carefully excluded the need to look into the Centre’s needs to finance.

Still, devolution, or sharing of tax collection by the Centre with the states, should not be impacted, was the Planning Commission’s decision.

The 14th Finance Commission devolved 42 per cent of the total tax collected among the states as against the previous 35 per cent.

However, Ahluwalia expressed concerns about whether the fiscal limits of states would be observed at a time of debt waivers.

Subramanian, in his discussion, repeated his demand to give more power to institutions such as the GST Council and advocated that the incentives presented by the Finance Commissions should be forward looking, instead of depending on the past performance in collecting taxes.

“You need some new institution like GST Council. Implementing it would be difficult but we all agree that it needs to be done. Being too close to the people is a problem in taxation, so I am removing it and giving it back through some matching mechanism,” Subramaniam said.

On the question of funding for broader programmes such as millennium goals, the panelists agreed that it doesn’t have a direct political immediacy to it.

Funding for millennium programmes raises the question: “If we are in favour of some genuine federalism and that the sovereign state is responsible to the people, or are we in favour of paternistic centralisation?

"The millennium development goals are not reflective of any political constitutional targets or documents,” Ahluwalia said.

On the question why states are not penalised if they breach their fiscal targets, Subramanian said the Centre can prevent the states from borrowings, but the vice-versa doesn’t happen.

According to the CEA, “The notion of a universal basic income is slowly getting traction in India,” but it ideally should be a quasi-universal income, recognising that there can be people who earn much more than a universal basic income level.

“The beauty of fiscal federalism is that the Centre and the state just cooperate in this universal basic income.

"It is a cooperative federalism, where a state can say I don’t need your money, provided you don’t tie me up with targets such as MNREGA or similar schemes,” Subramanian said.

Photograph: Mukesh Gupta/Reuters

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