Articles by M Govinda Rao

Critically appraising the recommendations of the Thirteenth Finance Commission, this paper points out that despite some tinkering with one of the indicators, its approach to tax devolution suffers from the same limitations as those of earlier commissions. More alarmingly, the inability to offset the fiscal disabilities of the states has led it to recommend as many as 12 different types of grants with a host of conditionalities. There are serious questions over the design and implementation of these conditions, in addition to monitoring compliance. Besides, the commission's recommendations on the goods and services tax have been resented by the states and this has actually taken the reform agenda backwards. All this lends weight to the suspicion that yet another opportunity to reform the transfer system has been lost.

A new tax code that overhauls the complexities that have emerged in the Income Tax Act of 1961 has been long overdue. The draft Direct Taxes Code put out by the Finance Ministry for discussion and comment does just that in a number of areas. At the same time questions must be posed of the sweeping reduction in rates and restructuring of slabs in income tax, which are likely to rob the exchequer of a significant amount of income. Questions must also be asked of the proposed taxation of not-for-profit organisations.

April 2010 was the target date set three years ago for introduction of the Goods and Services Tax, but the economy is far from ready for the switch over. This article cautions against hasty implementation and lists the measures that need to be taken by the centre and the states in order to reap the benefits of the new indirect tax.

The Thirteenth Finance Commission faces a challenging task. Despite an improvement in recent years, the fiscal situation continues to be a matter of concern when off-budget liabilities and other fiscal risks are considered. With rising oil prices on the one hand and a surge in capital flows on the other, calibrating the transfer system in tune with counter-cyclical fiscal policy stance is a formidable challenge. This paper argues that irrespective of the wording of the terms of reference, the Commission would do well to focus on its primary task of recommending transfers to serve the objective of equity and incentives. While it is required to take into account a number of considerations, the focus should be on the transfer system. As an impartial body, the Commission should make a fair assessment of the central as well as state governments, ignoring the asymmetries in the wording of the TOR. As regards the transfer system itself is concerned, the paper argues that although it may be difficult to make drastic changes in the relative shares of the states, the Commission should give up the gap filling approach. Instead, after recommending tax devolution, the Commission should recommend grants to fully equalise expenditures on elementary education and basic healthcare. It is also possible to incentivise the transfer system for even those states that have a better record of providing education and healthcare to improve the quality of these services.

Fiscal decentralisation to rural local governments in India is meaningful only when the panchayats have adequate untied funds to provide public services assigned to them which require the assignment of tax powers. This paper shows that revenue mobilisation by rural local bodies is abysmally low. The assignment does not include any important revenue handles and the panchayats are not able to exploit properly even the only notable tax base assigned to them - the property tax. The paper argues that it is necessary to take a re-look at the tax powers of panchayats. It is also important to build administrative and enforcement capacity. An essential precondition for building such capacity is to create a reliable data and information system.