Given the multi-layered governments in India, one of the often heard objections raised in response to any tax reform is related to the violation of the federative principle. It is claimed that the new system takes away /reduces the right of the states / local governments to have mechanisms which ensure adequate revenue. Such an objection is not a uniquely Indian phenomenon. Brazil is a country similar to India in this aspect as well. Hence Prof. Cintra’s detailed response to this objection is applicable in its entirety to ArthaKranti BTT Proposal.

Let us look at the most apt response to this objection in the words of Roberto Campos as quoted by Prof. Cintra:[1]

The other objection has to do with the tax federalism and the autonomy of states and municipalities. But this autonomy is more adequately preserved when state and local government are granted guarantees of automated collection of revenue and availability of funds for spending, than the illusory power to create evasion-ridden taxes that require costly fiscal bureaucracy to raise revenue. States and municipalities would be given their revenue shares without any bureaucratic or political intermediation.

Prof. Cintra goes into greater details about the true nature of autonomy and states: [2]

· One of the myths that have hindered tax reform has been the belief that an essential requirement of federative autonomy is to preserve the three separate tax revenue machines at the three levels of government. Some federations, such as Germany, have centralized tax collection.

·The true autonomy and independence of states and municipalities rest in their freedom to spend according to their own priorities. The method of tax collection should be the simplest and cheapest possible, and funds should be partitioned and delivered automatically and instantaneously.

On this sharing of revenue he further clarifies [3]

From a strictly financial point of view, it seems that a constitutional guarantee of revenue sharing among the various federated entities, adhering to a negotiated proportionality system, would be sufficient to ensure federative autonomy.

ArthaKranti BTT Proposal handles this situation by direct percentage share as well as the redistribution of collection at higher levels through Finance Commission.

As Prof. Cintra states that practical considerations cannot be ignored while proposing or implementing tax reform. The current structures become amenable to change only after there is adequate evidence of the workability of the radical proposals. He states:[4]

However, we cannot disregard that, according to a respectable current of jurists, the Brazilian federative model would be inseparable from the relative taxing autonomy of the federated entities, which means they must have their own taxing jurisdiction and authority, with the power to determine the variables that make up their own taxes and their respective administration.  It is not convenient to ignore the legal/political institutionalism anchored in our historical tradition. This is the reason we, when in doubt, may prefer the gradual path, with the introduction of the Single Tax in phases, beginning exclusively in the federal sphere and postponing facing the problems associated with the federative issue to when states and municipalities join in this tax model at a later point in time.

In India, the GST reform championed by the FRBM Act Implementation Task Force has been facing such resistance from the states for a period of over eight years. The transition plan is one way to address such reservations. We would like to re-iterate that more than collecting, the right to spend is more important – the Government wants the right to tax because it wants to be assured of requisite revenue. Also important to note are two apparently opposite considerations – “the part cannot compromise the whole” and “the higher/central level cannot usurp the authority of the lower/local level”. The most important difference in the two situations would be the adequacy of revenue. This will change the tone of the conversation.

 


[1]Page 136-140, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009

[2]Page 142, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009

[3]Page 72-75, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009

[4]Page 136-140, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009