Topics on Which Notes Are Required

TOPICS ON WHICH NOTES ARE REQUIRED

47 Taxation Efforts

(a)Kindly furnish a note indicating the taxation efforts taken by the States for improving tax GSDP ratio during the last five years.

1.The economy of the State is primarily agrarian and its structural composition has not changed much over the years. Therefore, with 27.41% of the GSDP accruing from agriculture, mining, fisheries and forestry, the effective tax base provided by the non-agricultural GSDP is relatively low and it constrains the tax potential.

2.During the last 5 years yearwise tax/GSDP ratio is as follows:

(Rs. in Crores)

Year / GSDP at current prices / Total Tax Revenue (TTR) / State Own Tax Revenue (SOTR) / Share of
Central
Taxes / TTR/
GSDP (%) / SOTR/
GSDP (%) / Central Share /GSDP (%)
2008-09 / 197276.20 / 24380.64 / 13613.50 / 10767.14 / 13.76 / 7.44 / 5.46
2009-10 / 227983.75 / 28349.79 / 17272.80 / 11076.99 / 12.36 / 6.90 / 4.86
2010-11 / 260198.47 / 37057.56 / 21419.35 / 15638.51 / 12.44 / 7.58 / 6.01
2011-12 / 309686.91 / 45192.58 / 26973.44 / 18219.14 / 14.24 / 8.29 / 5.88
2012-13 / 361873.91 / 51386.87 / 30581.71 / 20805.16 / 14.59 / 8.71 / 5.75

3.The increase in total tax/GSDP ratio from 13.76% in the year 2008-09 to 14.59 in the year 2012-13 show a marked improvement. Similarly, the State own tax/ GSDP ratio has also increased from 7.44% in 2008-09 to 8.71% in 2012-13.

(b )Whether any organised system has been put in place for tax policy analysis and revenue forecasting as a tool to informed decision making of the State Government? If so, details.

Under a DFID assisted programmme of strengthening performance management in Government, a macro economic modeling framework is being developed with a view to analyse and forecast the relevant parameters as an aid to more informed decision making.

Taxation Efforts

Tax revenue under various receipts heads for Commercial Tax Department is given in Table no. 1.

Table No. 1

Accounts
Items / 2007-08 / 2008-09 / 2009-10 / 2010-11 / 2011-12 / 2012-13 / TGR
30 / Stamps & Registration / 1531.54 / 1479.29 / 1783.15 / 2514.27 / 3284.41 / 3944.24 / 22.83
39 / State Excise / 1853.83 / 2301.95 / 2951.94 / 3603.42 / 4316.49 / 5078.06 / 23.84
40 / Taxes on Sales, Trade, etc. / 6045.07 / 6842.99 / 7723.82 / 10256.76 / 12516.73 / 14856.3 / 20.45
41 / Taxes on Vehicles / 702.62 / 772.56 / 919.01 / 1198.2 / 1357.12 / 1531.25 / 19.19
42 / Taxes on Goods & Passengers / 916.44 / 1332.57 / 1332.88 / 1746.2 / 2047.46 / 2395.03 / 20.66
45 / Other Taxes & Duties on
Commodities and Services / 27.89 / 29.95 / 31.41 / 45.21 / 58.88 / 77.65
23.22 / 24.17
A / Total Tax Revenue (TTR) / 2221.14 / 24380.64 / 28349.79 / 37057.85 / 45192.58 / 49916.5 / 20.18
B / State Own Taxes / 12017.63 / 13613.5 / 17272.8 / 21419.34 / 26973.44 / 30581.7 / 23
(TTR -SOTR) / 10203.51 / 10767.14 / 11076.99 / 15638.51 / 18219.14 / 19334.8 / 16.56
GSDP / 149840 / 171547 / 216958 / 271681 / 315387 / 361874 / 21.51
(TTR-SOTR)/GSDP / 0.07 / 0.06 / 0.05 / 0.06 / 0.06 / 0.05 / -4.07
(TTR-SOTR)/GSDP in % / 6.81% / 6.28% / 5.11% / 5.76% / 5.78% / 5.34% / -3.76%

Tax GSDP ratio during the last five years is given inTable no. 2.

Table No. 2

Year / GSDP at current prices / Toral Tax Revenue (TTR) / State Own Tax Revenue(SOTR) / TTR/GSDP
(%) / SORT/GSDP
(%)
2008-09 / 197276.20 / 24380.64 / 13613.50 / 13.76 / 7.44
2009-10 / 227983.75 / 28349.79 / 17272.80 / 12.36 / 6.90
2010-11 / 260198.47 / 37057.56 / 21419.35 / 12.44 / 7.58
2011-12 / 309686.91 / 45192.58 / 26973.44 / 14.24 / 8.29
2012-13 / 361873.91 / 51386.87 / 30581.71 / 14.59 / 8.71

Constitution has assigned limited taxation resources to the States. Unfortunately, there appears to be tendency to place restrictions on the legislative autonomy of the States to exercise its Constitutional powers even in these limited taxation fields to raise more resources or encroach into States' taxation domains. Levy of Service Tax on activities covered by Entries 55 & 62 has reduced space for States to raise resources from these sources assigned to them in the Constitution.

The Central Government has provided grants for JNNURM but impose the conditionality that States will have to reduce the rate of Stamp Duty on transactions involving immovable properties. Since the States continued to be heavily dependent on the Centre for grants, they find no option, but to agree for these conditionalities. On the one hand, the States have been forced to reduce their Stamp Duty rates but, on the other hand, the Central Government has levied Service Tax on housing construction activities which contibute to States' Stamp Duty when sold in the market.

Even in the case of tax on sale and purchase of goods, the Centre has only increased the list of "Declared Goods" to force States to bring down their tax rates. LPG, which is traded mainly by Public Oil Marketing Companies of the Union, has been included in the list of "Declared Goods". The Central Government unnecessarily took long time in raising the maximum permissible rate of taxation on the "Declared Goods" from 4% to 5% even after asking the States to raise the tax on these goods from 4% to 5%.

Even after the introduction of VAT regime in which the incidence of tax on industrial inputs is not passed on to the consumers of the output, industrial inputs continue to be included in the list of "Declared Goods".

The ratio of States' own tax revenue to GSDP has gone up substantially from 7.44% in 2008-09 to 8.71% in 2012-13, which indicates the success of the taxation efforts taken by the States. The efforts made in different taxation fields have been mentioned in the following paragraphs.

Stamp Duty

In addition to the statutory provision for identifying instruments in which the property is under-valued as per collector's guidelines, the deptartment has introduced an adminsitrative scheme also. Under this scheme, IGR & Deputy IGRs select a random sample of instruments registered with the registering officer in urban areas and the sub-registrar makes the spot inspection of these properties to find out the actual status and market value of the property. If the property has not been correctly described in the instrument resulting in under-valuation of the property, the collector of Stamps may, suo moto, call for and examine the instrument for the purpose of satisfying himself as to the correctness of the market value of the property, which is the subject matter of any such instrument and the duty payable thereon and if, after such examination he has reason to believe that the market value of such property has not been truly set forth in the instrument, he may determine the market value of such property and the duty payable thereon.

VAT The tax rate on all kinds of telephonic equipments, cellular phone was raised from 4 to 12.5% w.e.f. 01-08-2009 and Purchase Tax was levied on wheat @4% w.e.f. 01-08-2009 as part of additional resource mobilization.

Bidi was brought within the ambit of State VAT @5% w.e.f. 01.08.2009 which has been raised to 13% w.e.f. 01-04-2012. Proposal to bring textile within the ambit of State VAT was announced in the State Budget for 2012-13 but subsequently withdrawn because other States did not levy VAT on textiles, despite the agreement reached in the Empowered Committee. VAT @5% was levied wef from 01-04-2013 on the sale of liquor

A dedicated enforcement agency, called Anti-Evasion Bureau, was established in 2008 which has also improved the compliance rate.

Building Tax

For improving tax compliance in respect of the tax on the sale of building materials, a tax at the rate of 5% has been levied on the buildings constructed for sale or lease w.e.f 01-04-2011by inserting a new charging section in the State VAT legislation.Input Tax Rebate(ITR) is available on the tax paid on the purchase of building materials consumed in the construction of the buildings.The value addition in the housing construction activity can be taxed by raising the tax rate from 5%. This has brought the housing construction activity within the tax base of State VAT regime.Despite this new levy, there is no additional tax burden on the building. The Govt. has also notified one circle office in each of the four major cities-Indore, Bhopal, Gwalior & Jabalpur, exclusively for the collection of the tax from the construction sector. The tax collections from the sale of building materials has registered significant improvement. The growth in revenue in 2012-13 was 31% from the construction sector in the four major cities, despite a slowdown in the sector.

State Taxes on Services

The two old legislations have been repealed and replaced by MP Vilasita, Manoranjan Amod Evam Vigyapan Kar Adhiniyam, 2011.

Under the new legislation, following activities are taxable as entertainment:

(i)any exhibition, performance, amusement, game or sport to which persons are admitted;

(ii)entertainment provided by a direct to home (DTH) Service Provider through Satellite;

(iii)entertainment provided by a cable operator through cable service;

(iv)ring tones, music, videos, movies, animations, games, jokes, etc. provided by a Telecom service provider through telecom service;

(v)contests organised through telecom services by the Telecom Service Provider or any person;

(vi)entertainment provided by any other technological means or device.

Under the new Legislation, following services are taxable as luxuries:

(i)accommodation and other services provided in a hotel, the rate of charges per day for which, including the charges for air-conditioning, telephone, television, radio, music, entertainment, extra beds and the like is more than the amount as may be prescribed, but does not include the supply of food and drinks where such supply is separately charged for;

(ii)services provided in a beauty parlour, spa;

(iii)services or facilities, provided by a marriage hall;

(iv)services provided by a caterer, except provided in hospitals and educational institutions, but does not include the supply of food and drinks where such supply is separately charged for;

Entry Tax

Certain goods were taxable in the State VAT legislation but entry of these goods into a local area for sale was exempt in the Entry Tax legislation. The tax base of Entry Tax was expanded w.e.f. 01-04-2012 to make entry of these goods for sale taxable under the Entry Tax Legislation also. Consumer durables were taxable at the rate of 1% only in the Entry Tax legislation at par with goods included in the lower rate list of the VAT Legislation. The rate of tax on these consumer durables was raised to 2% w.e.f. 01-04-2010. The schedules containing commodity-wise tax rates under the two tax legislations were harmonised w.e.f. 01-04-2012.

To promote manufacturing activity in the State, Iron & Steel and auto components brought for manufacturing have been exempted from Entry Tax. Cotton, crude, edible oil and yarn have also been made exempt. Raw materials moved by an industry from one unit to another for further value addition have also been exempted from Entry Tax. Despite these exemptions and other tax concessions available under the industrial promotion policy, the revenue from Entry Tax has registered an impressive trend growth rate of 20.66%.

(b) Whether any organised system has been put in place for tax policy analysis and revenue forcasting as a tool to informed decision making of the State Government/ If so, details.

The State Government has very limited resources and expertise for tax policy analysis and revenue forecasting. Revenue forecasting is being done on the basis of statistical trend growth rate only. The State level data relating to commodity wise final consumption or the State-level Input-Output Table for production activities is also not available. This makes the revenue forecasting for VAT difficult.

The tax policy is being analysed by thesenior officials of the taxation department.Based on this analysis, efforts have been made to introduce new tax legislations, to expand the tax base of the existing legislations and to improve the tax compliance. The success of their efforts is reflected in an impressive increase in the tax GSDP ratio.

Impact on State Revenues from GST

Constitution (One Hundred and Fifteenth Amendment) Bill, 2011 was introduced in January, 2011 for replacing a number of indirect tax levies with "Goods & Services Tax". The Bill has been examined by the Parliament's Standing Committee on Finance which has submitted its report in June, 2013. The Union Finance Ministry has now circulated a revised Bill for the consideration of the States.

While welcoming the concept of integrating the multiple tax levies, Government of Madhya Pradesh has strongly opposed certain provisions of the Bill. The Apex Court has observed in Hoechst Pharmaceuticals Ltd and Ors vs. state of Bihar and Ors., 1983, 3 SCR 130 that "The Constitution gives independent sources of taxation to the Union and the States. Following the scheme of the GovernmentofIndiaAct, 1935, the Constitution has made the taxing power of the Union and of the States mutually exclusive and thus avoided the difficulties which have arisen in some other Federal Constitutions from overlapping powers of taxation". Madhya Pradesh is of the view that the proposed Constitutional scheme for concurrent taxation power will introduce the very problem in the working of the federal Constitution which the Constitution makers had consciously avoided.

Madhya Pradesh is of the view that through the proposed changes in the Constitutional scheme relating to the distribution of taxation powers, the Union Finance Ministry is trying not only to share the exclusive taxation domains of States but is also trying to control the same.

An important justification for the introduction of "Goods and Services Tax" is that the proposed GST regime can yield the same amount of revenue at relatively lower rate which the States are now getting through multiple levies on goods and services separately. The lower tax rate in the GST regime is supposed to be the result of the huge revenue gains for States from the taxation of services in the proposed GST regime.Government of Madhya Pradesh strongly doubts this claim regarding huge revenue.

C-efficiency of GST/VAT in most of the countries, where essential food items, health & education and public transport services are exempt, is in the range 30% -40%. These countries have much higher per capita income and much smaller share of expenditure on food. Therefore, for Madhya Pradesh with own Tax Revenue to GSDP ratio at 8.5%. RNR will be around 25%. Even the Standing Committee on Finance has emphatically said that “a credible study would also be required to evaluate the impact of the GST regime on the revenues of States".

GST is a broad-based consumption tax and will cover within its ambit all the sources of taxation assigned to the States in the Seventh Schedule of the Constitution, though in the beginning, the Government of India does not intend to subsume all the States tax levies within GST. Economic activities included in sectors such as road transport, housing construction and generation & distribution of electricity are already contributing to States’ tax revenues through levies like motor vehicle tax, Stamp Duty and Electricity Duty. If some sectors of the economy are kept outside the ambit of GST, then there will be difficulty in transferring the taxes collected on inputs used by the exempt sectors to the States consuming the output of the exempt sectors. This can raise the capital cost of investment in these sectors with additional tax levies on their output outside the GST regime. The net tax incidence of taxes on these sectors would be unsustainably high. If all the States tax levies are to be subsumed in GST, the loss of revenues to the States will further grow up.

Since, the Constitutional scheme for the implementation of GST and the design of GST are still not clear, it is not possible to estimate the revenue loss to States, on account of the introduction of GST.

Government of Madhya Pradesh is against any proposal that takes away the fiscal autonomy of the States and makes them dependent on the Union Government for compensation on account of the revenue loss in the new system. States must continue to have the Constitutional powers to raise resources to finance development programmes for the accelerated development of its economy and the welfare of the people.