Partial withdrawal of Sales Tax exemption :

| 08 October 1999 11:44 IST

By Luizinho Faleiro, Chief Minister
Circulated to the media on 5 October 1999

1. The state of Goa has the best social indicators in the country like high literacy, Low birth rate, low mortality, better nutrition. We are about to prepare the Human Development Report for Goa with the assistance of UNDP with a seminar to be held on 26th - 27th October 1999.

2. Since the attainment of statehood, the onus of raising resources has increased on account of the Gadgil Mukerjee formula which effectively discriminates against better performing states by giving a higher value to population and poverty in the distribution of taxes collected by the Central government. Our own tax and non-tax resources have climbed from 62.3% of the total non-debt resources in 1991-92 to 84.5% in 1999-2000.

This is in contrast to the rapid decline in Government of India's contribution as per the Gadgil Mukerjee Formula from 37% in 1991-92 to 15.5% in 1999-2000. This has underscored the need to find viable sources of revenue to keep the pace of public investments in various schemes.

3. My Government now seeks to shift focus to sectors like Irrigation, Roads and bridges, Water Supply and Sewerage and Power and thus complete the unfinished agenda of infrastructure development. Speedy development of these sectors in the past has suffered for want of funds. My Government seeks to reverse this situation and make adequate resources available for infrastructure development.

4. For increasing the availability of resources and prevent immediate burden on citizens, Government in the recent past has tried to meet the expenditure on infrastructure by raising borrowings. A pointer in this direction is reflected in the share of borrowings in our total financial resources.

The share has increased from 17 percent in 1997-98 to 30 percent in 1999-2000. As a result, interest payments have shot up from Rs. 118.12 crore in 1997-98 to Rs.184.04 crore in 1999-2000. This will increase into a debt trap if measures are not taken to arrest it.

We are at present borrowing to pay this interest liability and this is an untenable situation. The non-plan expenditure gap has increased from Rs 54.47 crores in 1997-98 to Rs 99.52 crores in 1999-2000. This is largely due to the enhanced salary of government employees on account of Vth Pay commission scales.

Ultimately, this burden will have to be met by raising our revenue resources. Higher growth in revenues will also increase the financial capability of the State to raise larger borrowings and develop infrastructure.

In my budget speech, I stated on the floor of the Assembly that out of one rupee 33 paise goes into salaries, 4 paise into pensions, 12 paise into grant in aid, 22 paise into interest payments and public debt, 14 paise to others like office expenses, plant and machinary, local bodies, schools and colleges etc. There is hardly 15 paise left to spend on capital expenditure.

In order to reign in non-plan expenditure, I have stopped all new recruitment, banned creation of posts, ordered redeployment of staff, 263 employees have retired last month and I am not filling up the posts unless they are technically essential. We have to take measures to reduce the bureaucracy over time.

5. During the Janta Darbars, which I have been holding, one thing has become clear. The people are demanding better roads, water supply and power. This requires greater infrastructure investments which can only be possible with greater resource mobilization since the state has to commit nearly 30% to 40% of state funds to match higher borrowings from the financial institutions.

6. With the view to raising our revenues from Government of India, we have submitted a memorandum to Eleventh Finance Commission. However, we feel that along with asking for our due share from Government of India, my Government should also raise its own revenues. In this respect, my Government has decided to recover its costs of providing services by charging appropriate prices.

To recover our costs, we have made a beginning. Water and sewerage tariff has been doubled in 1998-99 with a further hike of 20% wef. 1/10/99 for certain categories. Power tariff is regularly raised on an annual basis and has been increased by 45% in the last three years to off set the impact of IPP power, which we are purchasing.

Tariff hike will meet our costs and obviate the need for a financial prop from other resources of Government. But we cannot indefinitely increase these tariffs and the need to resource generation is important.

7. We expect that this goal which reflects our commitment to financial prudence be adopted by all. Industries, which have hitherto been enjoying full sales tax exemption must also adopt this goal and share the burden of tax. The levy of 50% of sales tax will not in any way affect industry including small-scale industry and will help the state to make the required investments in infrastructure.

However, instead of raising their prices to meet partial withdrawal of sales tax exemption, we expect them to cut costs and remain competitive. This is the only way industries could reduce and gradually eliminate their dependence on sales tax exemption.

8. Only when industries cut their cost will they not pass their sales tax burden on people. This will make our industries globally competitive and justify the faith we have reposed in their ability. I propose to bring forth an Industrial Policy soon. The policy does not merely envisage industrial growth. It envisages industrial growth with equity and giving a new thrust to the sunrise industries, which can create new type of jobs for the Goan youths.

9. The state has been growing at a compounded annual growth rate of 16.3% of the NSDP. CRISIL has kept the state's rating at A-. The secondary and tertiary sectors alone contribute 86.7% of the NSDP. These require qualitatively better infrastructure. But they have pointed out that indebtedness is high at 36 % of the NSDP, which will have an impact on the debt servicing liabilities unless resources are raised suitably.

Revenue Deficit as a proportion of Revenue Receipts has increased sharply for 1.8% in 1997-98 to 21.5% in 1998-99. Consequently the Gross Fiscal Deficit as a proportion of NSDP has deteriorated to 8.9% in 1998-99 from 4.0% in 1997-98. This rising deficit has to be arrested.

10. Our sales tax and excise duties together makes up 83% of our revenue and there is little scope to tax higher due to the narrow base. It is time the industry shares the burden of raising resources and this is also required since we are moving towards a Value Added Tax regime wherein there is no scope for such exemptions as these are built into the VAT structure itself. I have decided to ask the National Institute of Public Finance and Policy New Delhi to study the pros and cons of the possibility of introducing VAT system in the state.

11. For all state Governments and the Center, fiscal situation is in a mess. There is unanimity among all, that development concerns should be met with fiscal management and not mismanagement. Withdrawal of Sales tax exemption is a step towards fiscal management. It also provides an opportunity for the industrialists to build competence.

I propose to put the resources generated as a result of these measures into a separate Infrastructure Development Fund, which will be used to finance the infrastructure. Thus it will be resources committed for infrastructure improvement.

12. The per capita tax is the highest in Goa at Rs. 2264.17. This means that people are paying taxes. In the category of tax to NSDP ratio too for 1995-96 Goa is at the top. The industry has to contribute its share in the effort of the state to take recourse to larger borrowings from financial institutions without getting caught in a debt trap and have the capacity to repay the debt through suitable resource mobilization.

Through the measures of reduction in sales tax to 50% in respect of industries, we hope to raise additional revenue of Rs. 10 crores. We have to look ahead towards the new millenium with a strong economy and excellent infrastructure to face the challenges of globalization and increased competition.

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