States deserve higher tax share, says study

Apportionment of rates between the Centre and the States under Goods and Services Tax (GST) regime has assumed significance in the light of the Supreme Court judgment on liquor outlets.

Anticipated loss of revenue from alcoholic liquor for human consumption would mean that the States are faced with the prospect of erosion of revenues from sales tax and State excise duty.

This makes the case for a higher share of taxes for States under the GST regime, according to a study by R Mohan and N Ramalingam, public finance experts. Additionally, there have been signals of slowdown in the economy as reflected in central excise (non-petroleum) and VAT collections after 2013-14.

But the Centre may be able to make up through higher direct tax collections, an option that is denied to the States, the study said.

Given this, any future subsuming of petroleum products in GST should be considered only if the States are allowed to tax it at a higher rate band fixed by the GST Council.

Other than petroleum and tobacco products, major commodities which attract central excise are iron & steel, cement, chemicals, motor vehicles, plastics and machinery.

Along with petroleum and tobacco products, they make up 80 per cent of central excise collections. Petroleum and tobacco products alone constitute up to 70 per cent.

Growth in commodities, other than petroleum and tobacco products, have either been stagnant or negative. And, it is this part of central excise that is getting subsumed in GST.

The Centre still has the right to levy excise duty on tobacco products.

The share of central taxes being subsumed is only 20.49 percent as per budget figures for 2015-16.

It still is left with buoyant sources of revenue such as corporate tax, personal income tax and the right to levy surcharge and cess on these taxes, besides customs duty.

The present base of central excise and service tax is above the exemption limit of ₹1.5 crore. Under GST, the Centre will be able to tax up to retail sales above the exemption limit of ₹20 lakh. This would allow for a substantial expansion of the tax base of the Union.

As for States, the expansion of base is the service tax, currently levied by the Centre. The part of State taxes subsumed in GST is 41.34 percent.

This calculation is based on Kerala’s finances but should more or less similar for other states as well, the study said.

States do not have any buoyant source left after the VAT-leviable commodities get subsumed under GST.