The central government’s “severely poor fiscal policies”, including high taxes on auto fuels, and delays in monetary policy action by the Reserve Bank of India (RBI) have fueled inflation, leading to higher taxes on petrol and diesel for states. It has become difficult to cut. Tamil Nadu Finance Minister Palanivel Thiagarajan said in an interview that individual states may cut fuel taxes and create mismatches between neighboring states and affect tax revenue.
Thiagarajan said Tamil Nadu wants a two-year extension of Goods and Services Tax (GST) compensation beyond June 2022, even as it seeks to improve the state’s revenue receipts. Edited excerpt:
With inflation rising, how can the states and the Center provide relief?
Inflation is largely managed through monetary policy and to a lesser extent by fiscal policy at the federal level. At the fiscal level you are a sort of manipulative variable that is only likely to have medium to long-term consequences, and there are relatively few variables that may have immediate consequences, whereas, monetary policy by design has immediate consequences, whether it is liquidity. Ratio or money supply. If you do something wrong in the long run, may you avoid the consequences because the market and (economic) cycles are going your way for some time, but in the end you will have to pay the Piper. What we are seeing now is poor fiscal policy by the central government for many years, which has been exacerbated by the RBI at a very slow pace to move forward on monetary policy. While there are external factors beyond our control, including supply chain disruptions, uncertainty and uneven recovery from the pandemic, I point to the seriously poor policies and timely action by the Indian government over the past eight years that we have been taking. are doing. Am doing it now, which in my opinion is too late. They should have started reacting earlier, when they first saw signs of inflation months ago.
Do you still have scope to cut taxes on petrol and diesel?
The government is of the view that we are ready to do what we can. However, personally, I would say that it is atrocious and tantamount to an emotional blackmail in (centre-state) relations. The Center increased the duty in petrol by five-six times and in diesel by 10 times. Then you take a cut when petrol prices increase by 200% and diesel by 500% compared to 2014 and once you start fighting the consequences of your actions, you ask that all states be taxed. should be cut. I think it’s funny. The Center did all the hikes (taxes) and now it is asking us to cut them all. With 90% of the powers with the Center and 10% of the states, it is just a mockery of democracy and logic. Lastly, unless every state around Tamil Nadu cuts taxes, it could lead to arbitration.
With GST collection touching record levels, will TN still push for a two-year extension of compensation?
If seasonality is taken out in the GST data, then every month a new record should be set. If your economy grows by 8%, your GST revenue should grow by at least 8% or more. So every month a new record should be made. The Tamil Nadu chief minister has already said that the GST compensation for states should continue for at least two years to cover two years of the pandemic. The Center says that by increasing the compensation, the problem of free riders is going to arise. The argument is that it takes away the incentive for states to improve their collections. We are of the view that the Center has taken away all our rights of taxation in favor of the GST Council. It is the center’s job to compensate us because you haven’t left us with enough equipment or degrees of freedom to do our job (to raise revenue).
What do you understand by flawed fiscal policy?
One, on the taxation side, I think petrol and diesel taxation is a part of a broader move away from progressive direct taxes. Such taxes almost always disproportionately affect the poor and vulnerable, whereas income taxes can be progressive by design. Second, the Center has not been as good at execution as it has been in making announcements. It also includes the privatization pipeline. The whole approach has been embarrassing. This has led to relatively low valuations and thus has not built up the performance capability which is the hallmark of good results.