Fiscal Problem in West Bengal: Towards an Explanation
Mon, 2012-03-26 15:53 — subhanil
The fiscal problem of West Bengal, in terms of a low Own Tax Revenue generation as a proportion of the Gross State Domestic Product (GSDP) and a high debt-GSDP ratio has generated a lot of debate in and outside the state. This article written by me and Zico Dasgupta is a modest contribution to this debate, published in Economic and Political Weekly. The article can be downloaded from the attachment below.
| Attachment | Size |
|---|---|
| West_Bengal_EPW.pdf | 428.98 KB |
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Comments
Sales Tax is dependent on Manufacturing or Consumption?
Subhanil,
The only question I had is : How is ST dependent on Manufacturing ? I thought it is collected at the point of Consumption. Your argument would have been valid for Excise.
Shall be obliged if you could explain.
Upal
On Sales Tax and Manufacturing
The level of sales tax, by definition, of course depends on the consumption expenditures. However, there exist two distinct problems in explaining the trend of sales tax by this approach. The first problem is a minor one, which is associated with the availability of data. While data for sales tax is available on year to year basis, the only available data source for consumption expenditures of states is the NSS. Thus data for consumption expenditures is not available on year to year basis.
The second problem is of more serious nature, which is associated with the composition of consumption expenditures. Sales tax comprises of State sales tax and Central sales tax. The revenue for the state sales tax is generated from the consumption expenditure of the state on commodities produced within the state. The revenue generated for the central sales tax is generated from the consumption expenditure of other states on the commodities produced within the home state. The tax rate on state sales tax is much higher than that of central sales tax.
This implies that a higher consumption expenditure on non-food items of the state will not be associated with higher sales tax revenue if the rise in such expenditures is made on commodities produced outside the home state. Or in other words, there does not necessarily exist any one to one relationship between sales tax and consumption expenditures on non-food items.
Till the implementation of service tax, however, the effective tax rate on the manufacturing sector was highest among other non-food items. Thus, for a given share of non-food expenditures on domestically produced commodities in total consumption expenditures, the trend of the sales tax revenue would depend on the output of the manufacturing sector. However, there exists no a priori reason why this share of non-food consumption expenditure on domestically produced commodities in total consumption expenditure would fall with the rise in the output of domestically produced manufactured goods. Thus, cetaris paribus, there exists a positive relationship between sales tax revenue and the output of the manufacturing sector.
It is in this backdrop, I believe, that the trend in the output of the manufacturing sector is argued to explain the trend of the sales tax in the state. However, it is to be noted that such a relationship would de-facto hold only if the share of non-food expenditures in domestically produced commodities does not change considerably in the given period. Or in other words, there exists no theoretical necessity why this relationship should de-facto hold for all the states. The fact that it has in the case of WB, is empirically shown in the article.
Regards,
Zico
Sales tax and Manufacturing
Comrade Zico,
This is not wholly correct.
Companies can transfer stocks through a Stock Transfer Note to a Warehouse located inside the State and then sell - thereby paying Local ST. The Warehouse can also be manned by a C & F agent . In both cases, ST Registration has to be obtained.
This is true for large and even medium manufacturers of consumer Goods. Your argument may be true for Capital Items like Plant and Machinery, etc or sales in bulk where there is no regular sales pattern but bursty sales . In such cases, it is not economical to open a Warehouse and Manufacturers instead pay Central Sales Tax by selling directly to the user or reseller.
Previously, there was Multi-Point Sales Tax where even if CST was paid, a 2nd point State Sales Tax could be levied on the retailer or distributor when he resold the item. Am not sure if this still remains.
Upal Chakraborty
Sales tax and Manufacturing: a reply
Comrade Upal,
I have absolutely no disagreement with you on this. But, the point remains, that in a situation described by you, the effective tax rate in manufacturing itself changes. And if it does, ceteris paribus, share of manufacturing and the share of sales tax in GSDP cease to have a one-to-one relationship. There are several other routes through which the effective tax rates can get changed. And that is precisely why there exists no a priori reason to believe that such a one-to one relationship should necessarily hold in reality.
The one-to-one relationship, however, shall hold if the effective tax rate de-facto remains more or less unchanged over the relevant time period. And if it does, one should observe a one-to-one relationship between the two. It is precisely this de-facto constancy of the effective tax rate which has been observed in WB. This has been reflected in the strong correlation between the share of manufacturing and the share of sales tax in GSDP.
Regards,
Zico