Ch 4 Roman Saini
Released By Government of India Ministry of Finance Department of Economic Affairs Economic Division January 29, 2018 Presented By Roman Saini
List of Chapters 1. State of the Economy: An Analytical Overview and Outlook for Policy 2. A New.Exciting Bird's-Eye View of the 3. Investment and Saving Slowdowns and Recoveries: Cross-Country Insights for India 4. Reconciling Fiscal Federalism and Accountability: Is there a Low Equilibrium Trap 5. Is there a Late Converger Stall" in Economic Development? Can India Escape it? 6. Climate, Climate Change, and Agriculture 7. Gender and Son Meta-Preference: Is Development Itself an Antidote 8. Transforming Science and Technology in India 9 Ease of Doing Business' Next Frontier: Timely Justice ian Economy Through the GST
CHAPTER 4 1. Introduction Direct Tax and Development 2. Local Government: What do Reconciling Fiscal Federalism and Accountability: Is there a Low Equilibrium Trap? we know? 3. State and Local Governments: Posing an Entirely Different Question 4. Conclusion: A Low Equilibrium Trap
Introduction "No representation without taxation." In other words, taxation is the economic glue that binds citizens to the state in a necessary two-way relationship. Direct taxes feel more like expropriation because they reduce citizens' disposable income, the earnings that they get to keep. With indirect taxes, citizens are burdened but that sense is leavened to the extent that citizens feel they are exercising choice. Two international stylized facts help motivate issues relating to fiscal federalism, taxation, and accountability are as such 1. Direct taxation and development: General Government 2. Direct taxation and development: Sub-federal levels
1. Direct Taxation and Development : General Government First, economic and political development has been associated with a rising share of direct taxes in total taxes Advanced countries collect a substantially higher proportion of their taxes as direct taxes than do emerging markets. This proportion has also risen over time. Apart from China, India has the lowest share of direct taxes in total taxes. However, unlike in other countries its reliance on direct taxes seems to be declining, a trend that will be intensified if the Goods and Services Tax (GST proves to be a buoyant source of revenue
2. Direct Taxation and Development: Sub-federal Levels A second stylized fact relates to direct tax contributions at sub-federal (state and urban/rural local bodies) levels of government. Fiscal decentralization is often embraced as not just a desirable economic but also as a political and philosophical principle. This is captured in the idea that spending and tax decisions must reflect local preferences as far as possible There is an important legal argument for the case that resources received by the states as part of successive Finance Commission verdicts are not "devolved" resources but shared resources In this view, the Center is merely collecting the taxes in the divisible pool on behalf of the states, and sharing it with them.
But this position must be assessed against the following realities: It is difficult to dispel the association (in the eyes of taxpayers) of the Center with the income taxes and customs duties that form a major part of the divisible pool If the Center were a mere collecting agency the funds would be apportioned according to states' tax bases; they would not have sizable redistributive components . The new GST provides a sharp contrast in that it is clearly more "shared" because decisions and tax administration are done by both. . India stands out as a country where the second tier (states) generate a very low share of its revenue from direct taxes: about 6 percent in India compared to 19 percent in Brazil and a hefty 44 percent in Germany.
At the third tier, India's rural local governments (RLGs)' reliance on own resources is just 6 percent compared to 40 percent for third-tier governments in Brazil and Germany. And panchayats raise about 4 percent of their overall resource envelope in the form of direct taxes, compared with about 19 and 26 percent in Brazil and Germany respectively This is evidence that ULGs have emerged more fiscally empowered than RLGs so far in India Therefore, an question aries that the current system in India appropriate, and if not, can it he changed?
Local Government : What do we know? The famous 73rd amendment and 74th amendment to the Constitution (1992) recognized panchayats and urban local governments as institutions of . RLGs or panchayats were mandated to have three tiers (at the district, . States were mandated to devolve such functions and authorities to RLGs which States were also supposed to constitute a quinquennial State Finance self-government. intermediate and village levels) in states with population of over 20 lakh would enable them to function as institutions of self-governance. Commission (SFC) to determine the share of their financial resources going to the local tiers, analogous to the Finance Commissions at the union level
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