Focus on State Policies

Context: In the light of compensation cess issue, an analysis of trends in consumption tax collection and its distribution between Centre and States pushes for focus on states’ economic policies, having a far higher economic impact on us as citizens.

Reasons to focus on state policies: 

• Reversal in tax distribution: where in 1991 the distribution between Centre and states was in the ratio 60:40, now it has reversed to 40:60 respectively.
• Post 2008 Global Financial Crisis (GFC), the Centre cut excise rate to stoke up demand, while the state tax claims on overall consumption kept increasing due to real estate price hikes.
• Barring the period of FY2003-08, overall claim on taxes by government has actually reduced in every period. 
• States have further increased fuel taxes 
• Low state specific consumption taxes: While we have very high consumption taxes on categories like transportation, our taxes on property, agriculture and jewellery are lower than many other countries. 

• Overall tax collection has remained in a narrow band: 19.98% in FY1991,16.60% in FY2002, 21.39% in FY2008, 18.45% in FY2015, 19.59% in FY2020 

• Despite significant changes in the consumption mix:
• Service tax was first introduced in 1995, 
• Value-added Tax, in 2005, 
• Goods and Services Tax, in 2017.
• Only 20% of the overall consumption spends goes to the government, the remaining 80% goes to private. – similar to Organisation for Economic Cooperation and Development  (OECD) countries.

Conclusion: Major portion of tax claim goes to states rather than centre and thus have higher economic impact on citizen. Therefore we need to shift our focus towards states to ensure accountability.