CHENNAI: Tamil Nadu Finance Minister Palanivel Thiaga Rajan has introduced several fiscal reforms during the last one year and says the bandwidth to process so much change takes time. He says for any reform to succeed the government should be fair, transparent and implement it well. Excerpts
Q: This is the first time a State Finance Minister is bringing in so many fiscal reforms. What are the challenges you see in implementing them?
A: We are trying to reform so many different things at the same time. We have introduced litigation and risk variables and reviewed the whole audit mechanism. We have a committee for fiscal federal interventions and ushering in computerisation and technology. We are bringing in a scale of reforms. The bandwidth to process so much change takes time. This probably is the real challenge.
Q: The White Paper last year mentioned that the State's Own Non Tax Revenue (SONTR) for 2020-21 has dropped dramatically. How do you plan to increase it?
A: State's Own Tax Revenue was around 6 per cent of GSDP. The overall tax to GSDP ratio, both revenue and non tax revenue, dropped drastically. It used to be 9 to 9.5 per cent. Now it has dropped to 7 per cent before the pandemic and dropped to 6 per cent or went below 6 per cent during the pandemic.
We want to take it back to 9 to 9.5 per cent within this five-year term. There are two components to it. One is preventing leakages primarily in three or four sectors. These include commercial taxes, registration, excise, alcohol, and mining.
Similarly, a lot of tax rates have not been resettled for the last 20 to 30 years. These include property tax rates and motor vehicle registration rate. Many were not adjusted to inflation or cost of living. So, we need to bring that back in.
It is not a problem unique to Tamil Nadu. It is across the States. The 15th Finance Commission has noted it. They have given both recommendations and incentives to correct this problem. It was the 15th Finance Commission which wanted the tax to be rebased before the end of fiscal 2021-22.
Otherwise, Tamil Nadu will not be eligible for another Rs.15,000 crore worth of grants under Amrut 2 and smart cities programmes.
Q: Every reform has its challenges. Political parties have been opposing the property tax hike. How do you draw a line while implementing reforms?
A: It is about three things. The first is about fairness. It is to make sure the rate increases are progressive and each will be explained or justifiable in context of inflation or cost of living or per-capita income.
For example, the annual per-capita income in Tamil Nadu is about Rs 3 lakh. Property tax rates were last reset in Chennai in 1998 when the per-capita income was about Rs 60,000 to Rs 75,000 a year. So you have to put it in context to make it fair and make it progressive.
The bigger the house, the greater is the hike. So, commercial establishments pay more. After all, Property tax in Chennai is still lower compared to other major cities in India. Similarly, Madurai is less than Indore or comparable cities by 40 to 50 per cent. Tax in Tamil Nadu cities is not close to the national average.
The second is to be transparent in communication. Whenever you make these kinds of policy decisions you have to work with the people. Explain to them why you are doing it, why it is important, what will be consequences, what are the benefits because of this and what will happen.
For example, the cost of laying a road per 100 metres between 1998 and 2017 has gone up by 15 times. How can corporations keep up the infrastructure if they don’t get money? So, there is a need to communicate properly with the right comparisons.
The third most important aspect is to execute it well. If you raise property taxes, people should see the benefit of that. We must execute better infrastructure, more projects and better outcomes. These are the three ways to deal with it. Political opposition will always be political opposition.
In democracy, it is the people's understanding that matters. I expect the opposition to always be a critic. My concern is the people. If you do the three things, people will understand.
Q: The total divisible tax pool for States (as a proportion of total tax revenue) has actually shrunk as special levies are not part of the divisible pool of taxes. How would the advisory council on Federal Fiscal Model help in this regard?
A: Put all the numbers in context. That is what has happened as the result of GST, the states (lost) power to manage their own revenues. What are the limitations in the current system and how should we improve them? I don't want to get into specifics. What I am saying is that States should be given power to impose direct taxes such as income tax.
The time has come because States’ income has worn away so much. Per-capita income of some States like Bihar is half or two thirds of the national average. For States like Tamil Nadu it is double the national average.
Surely, direct taxation should be a power vested with the States. That is what the Union has done. It has greatly weaned away taxes away from progressive direct taxes towards regressive indirect taxation. Now, if this year's Union budget is to be believed, then the Union government is trying to correct it over the next two years to some extent.
The Centre has been projecting that direct tax collection is going to increase this year compared to last year and next year. Will that really happen? I don't know. We have to wait and see. But they are moving in the right direction at least on paper. But it is a long way from what it used to be in 2014. If you are going to be regressive at least let us be progressive!