Re: [se-decn] QUERY: Impact of GST on local governments. Advice. Reply by 31 August 2017
K.Gireesan
Dear members,
I would like to draw your attention towards an issue affecting the status, functional autonomy, financial autonomy, decentralized planning and delivery of goods and services of the Local Governments as a sequel to the launch of Goods and Service Tax (GST) in India.
In line with the intent of the Union Government towards Co-operative Federalism, a GST Council was formed consisting of the representatives from the Union Government and the State Governments/UTs. The Council had its deliberations on several occasions and on some issues like 'Lottery', it had thread-bare discussions for several hours running into multiple meetings.
I would like to put forward some of the concerns raised and discussed in an academic exercise taken up by the 'Local Government Observatory' operated by the faculty and students of the Department of Local Governance, Rajiv Gandhi National Institute of Youth Development on 21 August 2017 in which 13 students/faculty of the Institute took part. The discussion was on 'GST and its impact on Local Governance'. The points that emerged in the academic discourse are as follows:
- There was no representation of Local Governments (both rural and urban) when the GST Council was constituted. Though we were aware of the operational difficulties of involving representatives of LGIs from different parts of the country, a nominal representation could have been included. The timing of such an initiative is all the more crucial as the nation is celebrating '25 years of Panchayati Raj Institutions and Nagar Palika Institutions' in the country.
- Though several meetings of the GST council were held, no discussion was held about the possible impact of GST on local governance, with special reference to the local economy, functional autonomy, financial autonomy, extent of decentralized planning and delivery of goods and services by the LGIs.
In this context I invite members of the Decentralization Community for their inputs on:
- What are the areas where GST is likely to impact local governments and in what ways?
- What are your suggestions on a way forward to minimize adverse impact on local government institutions?
Your comments and suggestions will help us in further clarifying issues and advocating for solutions to these problems.
Regards,
K.Gireesan
Rajiv Gandhi National Institute of Youth Development
Sriperumbudur
Mahi Pal
Dear members,
First of all total tax revenues of local bodies is very less as a total funds of the local bodies, but it is always better to say some thing is better than nothing. There are two parts of the GST i.e central and state. Yes, IGST could also be levied on inter-state supply by the Urban Government. As per my understanding octroi, advertisement tax, entertainment tax are some of the taxes levied by the local bodies in various states. However, in GST regime such taxes have been merged in the State GST and therefore local bodies are no longer empowered to levy these taxes except entertainment tax and hence, disempowered. The exception would become the rule in 2-3 years when this would also be subsumed under State GST.
But the local bodies have the power to levy direct taxes like property tax or professional tax and can enhance their financial autonomy. However, there is less interest in most local bodies to levy taxes as they do not want to become unpopular in the GP. This is unfortunate. I have traveled around 400 villages in UP, Haryana and Rajasthan in connection with the Rurban Mission and found all the census villages have substantive opportunities to moblise taxes from their jurisdiction, but they are not doing so. Had these changed into Nager Panchayats (which they deserve, even some of the urban local bodies have been converted into GPs on two counts political and not giving taxes) they would have moblised funds. So, it is question of an order to change the status. In most of the cases Panchayats are at the disposal of bureaucracy and political leaders. This is not new. Ashok Mehta Committee observed this about four decades ago.
In my opinion, the issue is not tax or non- tax. Panchayats have to realise that they are governments and therefore they should act and be treated as government and not like agencies of Block and district level bureaucracy and state leadership.
Regards,
Dr. Mahi Pal
IES (retd.)
Ghaziabad
Original Query:
Mukul Asher and CP John
Moderator’s Note: We are posting the responses of Mukul Asher and C.P John to the query on impact of GST on local governments. Further responses are welcome. Regards, Tina Mathur.
Mukul Asher, National University of Singapore
In response to the query, I am sharing a short article on the impact of GST on urban and rural bodies that may be of interest to members. The article may be accessed at http://solutionexchange-un.net.in/ftp/decn/resource/res28081701.pdf (PDF; Size: 268 KB).
Some excerpts from the article are as follows:
Specific Implications of the GST for the States, the ULBs and the PRIs
These implications may be broadly grouped as follows:
- Tax Revenue Base of the States: GST will continue to be the single largest source of tax revenue in nearly all States. The GST (Compensation to States) Act, 2017 gives a list of taxes collected by the State or local bodies during the year for 2015-16, sum of which, will constitute base revenue of the State for the purpose of compensation to be made by the Centre to the State in case of any gap in its GST revenue collection. The list includes Value Added Tax(VAT), Central Sales Tax(CST), purchase tax, works contract, Luxury tax, Entertainment Tax, Lottery, Betting and Gambling, Advertisement Tax, Duty of excise on Medicinal and Toilet Preparation Act,1955 (MNTP Act), Entry Tax not in lieu of Octrai, Entry Tax in Lieu of Octrai/Local bodies Tax, Cesses and Surcharges, and fee leviable under entry 66 of the State List of the Constitution read with entries, 52,54,55 and 62 thereof. The SFC of each State should take into account the GST revenue base of the year 2015-16 provided by each State to the Centre, and the resulting GST revenue over next five years, in its work-plan and recommendations. It should be noted that the 14 percent guaranteed compensation is what the Centre has promised. If a State can grow its GST revenue more than 14 percent, it will be able to generate greater fiscal space. This is what each State should aim to achieve.
- Shift in the power of local bodies to levy specific taxes: Under the powers granted by the Constitution of India, each State has empowered the local bodies (both Municipalities and Panchayati Raj Institutions) to levy certain kind of taxes and fees through the respective State Legislations and Delegated Legislations. For instance, municipalities in Haryana may levy property tax, advertisement fee, water charges, octroi, toll tax, tahebazari, entertainment tax etc. under the respective legislation. In the GST regime, local bodies will not be having powers to levy some specified fees/taxes like advertisement tax and octroi. A review of the revenue configuration of some of the Municipal bodies in Haryana suggests that advertisement revenue constitutes significant portion of its own tax revenue. The impact of this part may need to be examined in detail by the legal division of the State of Haryana as entry 55 in List II of Schedule VII to the Constitution of India empowering States to levy tax on advertisements has been omitted by the Constitution (101th) Amendment Act effective from 16 September 2016. Similar analysis of advertisement tax will need to be conducted by each State, and its implications addressed.
- Local Bodies may start levying and collecting Entertainment Tax: In the present context, though the power to levy entertainment tax resides both with the State as well as the local bodies; in many of the States, this tax is levied and administered only at the State level, the local bodies currently do not levy this tax. During the GST regime, the States would no longer be able to levy this tax as it is subsumed under the GST. Local bodies currently do not levy this tax. But the local bodies will continue to have the power to levy and collect entertainment tax. Accordingly, if a State wishes to let local bodies levy entertainment tax, there would be a need to realign the tax legislation, with appropriate tax design and administrative and compliance arrangements. Under the GST, if the local bodies acquire capabilities to levy this tax, they may have an additional source of revenue available, positively impacting their potential to generate Own-Tax-Revenue(OTR). To realize this potential, willingness to tax and capacity to collect this tax will need to be effectively addressed by each State in its own context. This will not be addressed automatically, and legal, administrative, and other changes will be needed. The GST also provides an opportunity for the local bodies of each State to earn higher revenues under this head by realigning the basic coordinates of entertainment tax keeping into account the newer electronic mediums of entertainment like cable TV etc. The need would also be to create robust tax collection mechanisms.
Further details are available in the article.
CP John, Kerala
Congratulations for taking up such an important issue. Local Self Governments (LSGs) may lose huge amount of money if all the advertisements are roped into the GST net. The state governments should apportion adequate amount to the LSGs to compensate the loss.
From: K.Gireesan [mailto:gireesank...@gmail.com]
Sent: Thursday, August 24, 2017 12:21 PM
To: Decentralization Community <se-...@solutionexchange-un.net.in>
Subject: Re: [se-decn] QUERY: Impact of GST on local governments. Advice. Reply by 31 August 2017
Dear members,
Rajpal
Dear members,
I am in complete agreement with Dr. Mahi Pal. The local bodies should act like government and be treated like government. After 25 years of democratic decentralization through 73rd and 74th constitutional amendments, devolution in the real sense is yet to take place. Whereever some efforts have been made in this direction, local bodies have performed well. More and more financial dependence is hurting decentralization. GST seems to be posing more challenge to the local bodies. Elected representatives for various reasons including the political affiliation are not demanding devolution for strengthening the institutions, instead settling with some benefits to individuals. I suggest the following for assessment and recommendation with regards to implication of GST implementation on local governance:
- Civil society organizations and research institutions should conduct an independent assessment and come out with recommendations
-
State Finance Commissions should make an effort to do the assessment and bring out in their recommendation.
Regards,
Rajpal
New Delhi
On 25 August 2017, Mahi Pal wrote:
First of all total tax revenues of local bodies is very less as a total funds of the local bodies, but it is always better to say some thing is better than nothing. There are two parts of the GST i.e central and state. Yes, IGST could also be levied on inter-state supply by the Urban Government. As per my understanding octroi, advertisement tax, entertainment tax are some of the taxes levied by the local bodies in various states. However, in GST regime such taxes have been merged in the State GST and therefore local bodies are no longer empowered to levy these taxes except entertainment tax and hence, disempowered. The exception would become the rule in 2-3 years when this would also be subsumed under State GST.
But the local bodies have the power to levy direct taxes like property tax or professional tax and can enhance their financial autonomy. However, there is less interest in most local bodies to levy taxes as they do not want to become unpopular in the GP. This is unfortunate. I have traveled around 400 villages in UP, Haryana and Rajasthan in connection with the Rurban Mission and found all the census villages have substantive opportunities to moblise taxes from their jurisdiction, but they are not doing so. Had these changed into Nager Panchayats (which they deserve, even some of the urban local bodies have been converted into GPs on two counts political and not giving taxes) they would have moblised funds. So, it is question of an order to change the status. In most of the cases Panchayats are at the disposal of bureaucracy and political leaders. This is not new. Ashok Mehta Committee observed this about four decades ago.
In my opinion, the issue is not tax or non- tax. Panchayats have to realise that they are governments and therefore they should act and be treated as government and not like agencies of Block and district level bureaucracy and state leadership.
Original Query:
From: K.Gireesan [mailto:gireesank...@gmail.com]
Sent: Thursday, August 24, 2017 12:21 PM
To: Decentralization Community <se-...@solutionexchange-un.net.in>
Subject: Re: [se-decn] QUERY: Impact of GST on local governments. Advice. Reply by 31 August 2017
Dear members,
G.Raveendran and Bidyut Mohanty
Moderator’s Note: We are posting the responses of G. Raveendran and Bidyut Mohanty to the query on impact of GST on local governments. They highlight the issues of financial autonomy of local governments and the need to study the situation on the ground with respect to GST and local governments. Further responses are welcome! Regards, Tina Mathur
G. Raveendran, New Delhi
It is an important issue and needs to be addressed urgently. India presently has a three-tier government and not a two -tier government. Still the GST notification and sharing mechanism is only between the Central Government and State Government. The main issue is about the financial autonomy of the local governments. Is it that the local self-governments are not required to attain financial autonomy at any stage? It will not be in the interest of the decentralisation efforts of the government.
Bidyut Mohanty, Institute of Social Sciences, New Delhi
Actually it is worthwhile to find out in what ways the local bodies are involved in allocation of 40% enhancement in their tax share. If they themselves will be spending that amount in improving the infrastructure, then they will be subjected to GST in various stages of construction. So one should find out as to what way they are involved at least by going to the field in a state like Kerala. I also wonder if Elected Women Representatives (EWRs) are aware about the meaning and implications of GST.
From: K.Gireesan [mailto:gireesank...@gmail.com]
Sent: Thursday, August 24, 2017 12:21 PM
To: Decentralization Community <se-...@solutionexchange-un.net.in>
Subject: Re: [se-decn] QUERY: Impact of GST on local governments. Advice. Reply by 31 August 2017
Dear members,
Mahi Pal
Dear members,
There is need to have a workshop on the theme so that understanding on the issue available in piecemeal may be converged into a full understanding of the phenomenon. Decentralization Community may think of such a workshop. Our friends may suggest some relevant reading material other than those available on google.
I would like to say that GST may be a signal to the Local Governments to put their house in order in the sense to mobilize their own resources at their levels. Yes, there is a potential . For example, the number of census towns (CT) which were 1362 in 2001 Census ballooned to 3894 in 2011 census indicating an increase of 186 percent over a period. These CTs are well developed Gram Panchayats and have potential. There are cases where Nagar Panchayats (urban local bodies) have been converted to CT on political consideration as Panchayats received a lot of funds under CSSs and SSSs without any compulsion of mobilize own resources. Secondly, Gram Panchayats are getting more than 2 lakh cores funds as award of 14th Finance Commission and these bodies are using money for street lights, cleanliness etc . As villagers are getting these services, they may be charged some user charges.
Further, those Panchayats which have property or common land at their disposal and earning more than 20 lakh are also liable to pay tax. Or if some
are providing some services that may also attract tax. In view of above , capacity building of Panchayats in terms of hardware (office building, computer and related facilities, adequate personnel ) and software to enhance their own understanding as leaders
of the entire GP and not merely for those who voted him or her is a recurrent need.
Regards,
Mahi Pal
I.E.S (retd.)
Ghaziabad
Original Query:
From: K.Gireesan [mailto:gireesank...@gmail.com]
Sent: Thursday, August 24, 2017 12:21 PM
To: Decentralization Community <se-...@solutionexchange-un.net.in>
Subject: Re: [se-decn] QUERY: Impact of GST on local governments. Advice. Reply by 31 August 2017
Dear members,