The Centre should give the states a share of cesses and surcharges, including the super-rich tax levied on people earning over Rs 2 crore a year, according to one of the suggestions made at a meeting of state ministers (including some chief ministers) and Union finance minister Nirmala Sitharaman. A group of chief ministers, deputy chief ministers, state finance ministers, and other ministers from the states participated in pre-budget consultations with Sitharaman on Wednesday. They expressed concerns about a slowdown in the economy, suggested several measures, including a pause to the fiscal deficit target to revive the growth rate, and asked the Centre to compensate them for their revenue loss due to a sharp cut in corporate tax rate that involved a Rs 1.45 lakh crore loss to the exchequer, two officials familiar with the matter said on condition of anonymity.
States get a 42% share of the Centre’s tax revenue and anything that impacts the latter will hit their own revenues. “The taxation measures of Government of India have impacted the states. While the reduction of corporate tax will definitely provide a fillip to new investments, the loss of revenue is also shared by the states,” O Panneerselvam, deputy chief minister and finance minister of Tamil Nadu, said in a statement. The government on September 20 reduced the corporate tax rate for domestic manufacturing companies from 30% to 22% and for new manufacturing companies from 25% to 15% provided they forgo all other exemptions. The decision was taken to boost investment and accelerate growth. India’s GDP, which slowed to 5% in the first quarter of the current financial year, further slowed at 4.5% in the second (July-September) quarter, the slowest rate of growth since March 2013.
Panneerselvam asked the Centre to compensate states for their revenue losses due to the corporate tax rate cut by giving them a share of cesses and surcharges. “To overcome this loss, I suggest that many of the cesses and surcharges levied on Personal Income Tax and on Union Excise Duty which have increased substantially in recent years should be merged into the basic rate of tax, so that the States also receive the share from the additional revenue,” he said. Cesses are levied for specific purposes and states cannot claim their any share from the cess fund. They also do not get a share of surcharges. The Union budget raised the surcharge on tax for those with taxable incomes between Rs 2 crore and Rs 5 crore to 25% from 15% and for those with taxable incomes above Rs 5 crore to 37% (also from 15%). The move effectively increased the tax rate for these taxpayers to 39% and 42.74% respectively.
“The Central Government has been depriving the states of their legitimate share of revenue by resorting to cesses and surcharges. This should be reversed,” Panneerselvam said. Some states such as Kerala and Bihar suggested that the finance minister raise government expenditure on infrastructure projects and other economic activities through more borrowings while relaxing the fiscal deficit target to 4% of GDP in the next financial year. The fiscal deficit target for 2019-20 is 3.3%. The meeting was attended by chief ministers of Goa, Haryana and Puducherry, deputy chief ministers of Arunachal Pradesh, Bihar, Delhi, Tamil Nadu and Tripura and 17 ministers, including finance ministers, representing their states. Union minister of state for finance and corporate affairs Anurag Singh Thakur also attended the meeting.
Sitharaman “elucidated the Union government’s philosophy of ‘Cooperative Federalism’ and steps taken by the Union government to bolster growth” of the economy, a Union finance ministry statement said. State governments welcomed the opportunity to present their views and expressed their suggestions on growth, investment, resource requirement and fiscal policy. They also suggested measures to strengthen cooperation between states and Centre to help the Indian economy grow to a $5 trillion one. The finance minister welcomed the suggestions made by the states in the meeting and assured that the memoranda submitted would be examined and suitably considered, the statement said. Niranjan Hiranandani, senior vice president, ASSOCHAM, and co-founder and managing director of Hiranandani Group, said the government should raise investments on infrastructure to boost growth and press a pause button to its fiscal deficit target.