Pre-Budget meet: Tamil Nadu finance minister seeks merger of cesses, surcharges into basic taxes

The TN finance minister has requested the immediate release of the pending compensation of Rs 16,725 crore to the state.

.E-way bill generation by businesses rose to 6.79 crore for September from 6.59 crore in August and 6.42 crore in July. 
.E-way bill generation by businesses rose to 6.79 crore for September from 6.59 crore in August and 6.42 crore in July. 

Tamil Nadu finance minister Palanivel Thiaga Rajan on Thursday urged the Union government to merge cesses and surcharges into the basic rates of tax so that states receive their legitimate share in devolution.

Speaking at the pre-Budget meeting of state finance ministers called by Union finance minister Nirmala Sitharaman, he said the increased levy of cesses and surcharges, which do not form part of the divisible pool of taxes, has adversely affected the transfer of resources to states.

“Cesses and surcharges as a proportion of the gross tax revenue of the Centre have almost tripled from 6.26% in 2010-11 to 19.9% in 2020-21. In effect, states are deprived of a share in approximately 20% of the revenue collected by the Union. If these taxes were added to the divisible pool, the states would have obtained an additional transfer of approximately Rs 1.5 lakh crore as their share from the pool of central taxes in FY 2021-22,” he said.

Thiaga Rajan said as a consequence of this realignment, the ratio of grants in-aid to share in central taxes has increased from 62.67% in FY 2010-11 to 130.7% in FY 2020-21 for Tamil Nadu. While the share in taxes is a legitimate right and provides the state the autonomy to cater to local needs and aspirations, the grants-in-aid are discretionary and tied funds. This greatly impinges on the federal structure enshrined in the Constitution.

The TN finance minister, while demanding an extension of the period of GST compensation to the states by at least two years beyond June 2022, has  requested the immediate release of the pending compensation of Rs 16,725 crore to the state.

During the introduction of GST, the state accepted to forego its fiscal autonomy with an assurance from the Union government that the state’s revenue will be protected. In the last five years, there has been a wide gap between the actual revenue realised and the protected revenue guaranteed. This trend was visible even before the pandemic and the gap has been increasingly wide ever since. “The states’ revenues are yet to recover, and considering the huge revenue shortfall that is expected, I urge the Union government to extend the period of compensation by at least two years beyond June 2022,” he said.

Thiaga Rajan also demanded a rollback of the Union government’s recent decision to increase GST for the textile and apparel sector from 5% to 12%, saying this move would increase the financial burden on the already stressed MSME textile and handloom sectors which.

He has also requested the Union government to release pending dues at the earliest and make appropriate allocation in Budget 2022-23. For schemes shared between the Union government and states, approximately Rs 17,000 crore of the Union government’s share remains to be released, he said. Further, performance grants of Rs 2,029.22 crore from 2017-18 to 2019-20 and basic grant of Rs 548.76 crore for 2019-20 under the 14th Finance Commission are pending, he said.

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