Centre-State Coordination: Revenues Tapas K. Sen National Institute of Public Finance and Policy, New Delhi

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

Major Revenue Categories Direct Taxes on Income and Capital Indirect Taxes on commodities and services Non-Tax Revenues  Petroleum and Natural Gas  Other Minerals  Power (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