[Editorial Analysis] A tax burden that attacks the federal rights of States

Mains Paper 2:Polity and Governance
Prelims level: Centre-state relations
Mains level: Federalism

Context:

• The Central Government reduced excise duty on petrol and diesel on the eve of Deepavali. While the reduction for petrol was ₹5, duty on diesel came down by ₹10.

• The Centre has been levying around ₹31 and ₹33 as additional cess on petrol and diesel, respectively, till the beginning of November.

The constitutional mandate on taxation:

• The Constitution permits the Centre to levy cess and surcharges beyond the basic taxes and duties in extraordinary situations.

• Article 271 says that Parliament may at any time increase any of the duties/taxes by a surcharge for the purpose of the Union. Whole proceeds of any surcharge shall form a part of Consolidated fund of India directly. This means that this does not go to the divisible pool of the centre.

• Finance commission is set up once every five year under Article 280 to device a scheme of distribution of a share of taxes to states to address the imbalances in the state finances owing to lesser taxation power. At present, revenue collected from all Central taxes, barring from Cesses, Surcharges and Taxes from Union Territories and an amount equivalent to the cost of collection of central taxes forms a part of the divisible pool of taxes.

• Exception in GST: Parliament can’t levy surcharge on GST after 122nd amendment. Therefore the whole burden of the extra surcharges and cess have been put on the articles outside GST which is fuels, alcohol and electricity.

• Punchhi commission: Cesses and surcharges should be brought down in respect to their share in Gross tax revenue.

The Gross Misuse of Surcharge:

• Surcharge is defined as a small amount of tax levied over and above the existing tax.

• Problem: it is currently seven or eight times higher than the basic tax. Currently, the basic excise duty is ₹1.40 and the rest of the tax is made up of special additional excise duty and cess which would not go to divisible pool and to the States.

• Revenue data: The Union government has collected around ₹3.72-lakh crore in 2020-21 as revenue from petroleum products as per the data published by the Petroleum Planning and Analysis Cell (PPAC). Of this, only around ₹18,000 crore is collected as Basic Excise Duty. Around ₹2.3-lakh crore is collected as cess and the rest ₹1.2-lakh crore is collected as special additional excise duty.

Three important conclusions of this analysis:

• The basic tax component of the entire ₹3.72-lakh crore is merely ₹18,000 crore, which is as low as 4.8% of the total revenue from petroleum products;

• The divisible pool is only 41% of this ₹18,000 crore;

• Most importantly, cess and additional excise duty on petroleum products constitute around 95% of the total revenue from petroleum, which are not to be shared with the States at all.

Concerns due to this tax structure:

• Undermining federalism prevailing in the country. By unilaterally taking away the bulk of the tax revenues on petrol and diesel, the Centre has done injustice to the States. This is obtuse use of fiscal federalism. All States must oppose this in a united manner.

• No Input credit to the producers: leading to tax on tax. After the implementation of Goods and Services Tax (GST), States have the right to decide the taxes on just three goods — petrol, diesel and liquor.

• Relevance of revenue neutral rate (RNR): The promise of GST was that RNR will be implemented, which means States would get revenues similar to what they were getting before the implementation of GST. The average taxes on goods was 16% during the initial GST period. The average rate of taxes in goods at present is 11.3%. But has any consumer benefited from it? Instead, inflation has also been rising. All essential items are more expensive than the pre-GST price. Neither Governments nor the people have benefited from this.

Conclusion:

• The government must lower the taxation on fuel as a first step and eventually try to bring the fuel under GST to lower the tax and allow the state finances to get improved.

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Prelims Questions:

Q.1) With reference to the Tesla, consider the following statements:

1. Tesla makes more cars than company in the world.

2. Recently Tesla’s market capitalisation surged past the $1 trillion mark.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: B

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