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POVERTY REDUCTION STRATEGY TN

Table 3.3 shows the

Table 3.3 shows the performance of own tax revenues in Tamil Nadu relative to GSDP in terms of major tax revenue sources. It also gives annual buoyancy and growth rates of major taxes. GSDP is taken as the 1999-00 base series. By far the sales taxes are the most important source of own tax revenue in Tamil Nadu, followed by state excise duties and stamp and registration duties. The slightly lower budgeted figure for own tax revenue relative to GSDP in 2009-10 reflects consensus of the revenue impact of introduction to VAT which the state has recently implemented. The introduction of state value added tax (VAT) has implied some changes in the tax-GSDP ratio. The current practices in implementation imply restrictions on the taxrates that a state may have. For the states in general, the tax rates of 4, and 12.5 have been prescribed by the Empowered Committee of Finance Ministers. An indicative list of goods to be placed in different categories has also been provided. Tamil Nadu has historically been a highly taxed state. The shift to VAT essentially means that its tax rates will be in line with other states although there is some flexibility in the selection of goods that are placed in the exempted and lower rate category. As a result in 2007-08, the growth rate of sales tax fell drastically. The sales tax buoyancy has recovered since than but is still below one. As discussed earlier, the share of services in GSDP will continue to increase. But states are not able to tax the services since it has been placed in the union list. The fastest growth sector in Tamil Nadu is the services sector, taxation of which is reserved for the central Government. Much will depend on how the proposed goods and services tax (GST) takes shape. In BE 2009-10, as shown in Table 3.3, growth rates have fallen for most of the taxes. Sales tax revenue has fallen showing the impact of introduction of VAT. Appendix Table 3.1 shows the sequence in which states have introduced VAT in the country. However, as petroleum prices have increased substantially in 2008-09, and since special rates apply for petroleum grant products, it is expected that tax revenue buoyancy will remain high even in the case of State VAT. d. Non-tax Revenue: Untapped Potential Revenue collection in Tamil Nadu relies primarily on the state’s own tax system (about 70 percent). Another 15 percent of revenue comes from shared central taxes devolved to Tamil Nadu. Only 7 percent of total revenue is from non-tax revenue. Tamil Nadu ranks low in non-tax revenue relative to 14 major Indian states. Part of the reason is that some user charges (such as bus fares) do not go directly to the state’s treasury but are 58

collected by state-owned enterprises. In non-tax revenue there is some potential for increases. e. Fiscal Transfers to Tamil Nadu Fiscal transfers to Tamil Nadu come from Finance Commission transfers, Plan grants, and grants under various centrally sponsored schemes. In the aggregate, the transfers fell from 4.2 percent in 1993-94 to the level of 2.8 percent in 1998-99. These remained around 3 percent until 2003-04 and have started rising since then to 4.8 percent in 2007- 08 and thereafter came down to 4.1 percent in BE of 2009-10. Table 3.4: Grants Recommended for Tamil Nadu by the Twelfth Finance Commission (Rs. crore) Details 2005-06 2006-07 2007-08 2008-09 2009-10 Total Roads and Bridges 0.0 303.6 303.6 303.6 303.6 1214.4 Buildings 0.0 60.6 60.6 60.6 60.6 242.6 Forests 6.0 6.0 6.0 6.0 6.0 30.0 Heritage Conservation 0.0 10.0 10.0 10.0 10.0 40.0 State Specific Needs 0.0 75.0 75.0 75.0 75.0 300.0 Local Bodies Rural 174.0 174.0 174.0 174.0 174.0 870.0 Local Bodies Urban 114.4 114.4 114.4 114.4 114.4 572.0 Calamity Relief 156.8 164.7 172.9 181.5 190.6 866.5 Total 451.2 908.3 916.5 925.2 934.2 4135.4 Source: Report of Twelfth Finance Commission, 2004. The Twelfth Finance Commission (TFC) has fixed Tamil Nadu’s share in the total divisible pool of central taxes at 5.305 percent as opposed to 5.385 percent recommended by the Eleventh Finance Commission. This marginal decrease was neutralized since states’ share in the centre’s divisible tax pool has been increased from 29.5 percent to 30.5 percent. Thus, the share of Tamil Nadu has remained unchanged at 1.6 percent of central taxes during 2005-06 to 2009-10. However, Tamil Nadu has not obtained any special grants for education and health. It is the higher overall taxbuoyancy of central taxes that has increased Tamil Nadu’s share of central taxes relative to its own GSDP. The TFC has also recommended (Table 3.4) for Tamil Nadu, Rs. 1214 crore in grants for maintenance of roads and bridges, Rs. 242 crore for maintenance of public buildings, Rs. 30 crore for forests, Rs. 40 crore for Heritage conservation, Rs. 250 crore for development of urban areas and Rs. 50 crore for sea erosion, Rs. 1442 crore for local bodies, and Rs. 867 crore for calamity relief, over 2005-06 to 2009-10. As a result, 59

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