Raising State Resources

If Assam is to receive additiol fincial resources from the Centre, it must show it is doing something on its own to earn New Delhi’s support. This is why the State government had to perforce hike value added tax (VAT) rates on a range of commodities — so argues Fince minister Himanta Biswa Sarma. Higher VAT rates on 127 commodities listed in the Second Schedule of the Assam VAT Act will yield Rs 500-700 crores. According to Sarma, other states have also been hiking such state level taxes to raise additiol resources, so Assam is taking a necessary step rather late in the day. Sarma also held out a carrot that his forthcoming budget will slash prices of some essential commodities and give the common man a breather. In this context, it will be instructive to see what strategy the Bengal government is taking to shore up resources, while also keeping in mind that the two states are placed on very different footings. Bengal Fince minister Amit Mitra while presenting the first budget of the second Trimul government last month — categorically said that instead of imposing fresh taxes, he will adopt a two-pronged strategy. Firstly, he will ensure better compliance; secondly, he will trust in Keynes and go for multiplier-driven growth, which in turn will guarantee greater tax buoyancy. When asked why he did not raise tax rates, Mitra pointed out that if VAT was hiked by 1 per cent, it would yield Rs 500 crore, but Bengal’s debt burden happens to be Rs 3 lakh crore.

So the Mamata Banerjee government is still looking at the larger picture, despite the state’s increasing dependence on the Centre. It is a fact that Bengal’s own revenue generation has been steadily falling behind Central tax devolution and grants in revenue expenditure over the years. While there can be no comparison with Bengal, a question that can surely be posed to the new government in Assam — how serious is it about better tax compliance? Some of the biggest tax offenders in Assam are government servants themselves. Witness what happens in our check gates. Officials manning check gates help transporters avoid paying taxes in return for bribes, so the money goes to their pockets instead of the state exchequer. Chief Minister Sarbanda Sonowal has been issuing warnings against such corrupt officials, but his government will have to walk the talk. It does not help matters when alliance partner BPF’s supremo Hagrama Mohilari makes comments like “who won’t accept money if offered? ... the two BPF ministers in this government should also accept any moolah offered, though they must not ask for it”! It is always sound policy to have a simplified and ratiol tax structure while closing off loopholes, rather than allowing evaders to game the system or raise taxes across the board. The Chief Minister in his anxiety to assuage sentiments over the VAT hike move, seems to have taken recourse to word play when he claimed recently that it will be companies which will pay higher VAT rates, not consumers. His argument is that the consumers will only pay the maximum retail price (MRP) printed on commodities, while manufacturers fixing the MRP always keep a margin ‘to absorb any moderate tax hike’.

This seems highly unlikely, given that VAT is a cascading state level sales tax imposed at every level of value addition to the product. So each seller along the chain will pay tax and pass it on to the next seller; it is too much to expect that the consumer at the end of the chain will be let off from carrying the burden. As for the VAT hike on petrol and diesel, it is certain to impact general price levels. In characteristic fashion, Fince minister Sarma has spoken darkly of a larger liability burden on the State government to the tune of Rs 12,000 crore. He has also held out another carrot — that from next April, state government employees will get pay hikes at par with recommendations of the 7th Pay Commission, which in turn will further cost the State exchequer Rs 4,500 crore. The State government last week made a presentation to the Union Fince minister, pleading for restoration of 90:10 funding for the State, loans from exterl agencies at zero percent interest and other support measures. Whatever support the State government mages to garner, it has to keep in sight social spending in the right sequence, adequate support to agriculture and small business, and efficient tax administration if the people are to see ‘acche din’ in five years.