Articles by M Govinda Rao

Based on the recommendations of the Eleventh Finance Commission, the central government has instituted the Medium Term Fiscal Restructuring Programme (MTFRP). This paper evaluates the design and implementation of these schemes. The important conclusions of the paper are that (i) the size of incentive-linked transfers is too small to influence the fiscal performances of the states; (ii) the multiple schemes of incentives tend to create a system of segmented incentivisation; (iii) the design of the incentive-linked system has serious shortcomings, and (iv) the scheme fails to address the basic reasons for the deterioration in fiscal performances of the states.

This paper is concerned with the treatment of inter-state transactions in the levy of state VAT. It addresses the conceptual issues of central sales tax (CST) and the need to phase out the tax to ensure a common market, advances interim measure to reduce the CST to operational level and the final reform to zero-rate the CST, examines the revenue implications of CST reduction in the short term and zero-rating in the long term. It also examines the issue of compensating the states for the loss of revenues and finally deals briefly with the management information system needed to monitor inter-state transactions in the absence of CST.

This paper attempts to analyse the issues involved in extending consumption taxes to the services sector. Although the share of services in GDP is over 50 per cent, its contribution to tax revenue is not commensurate. Further, the prevailing taxes on services are overlapping and haphazard and are not conducive to the evolution of a coordinated value added tax at central and state levels. Besides, it is important to extend the tax also for reasons of revenue. The paper argues that for evolving a rational consumption tax system it is important to levy a general tax on services rather than continuing with the selective taxation prevailing at present. However, there should be a small but well defined exemption list and a negative list to avoid taxing services arising from the sovereign functions of the state and services of a meritorious nature. There should also be a threshold to exclude small service providers. At the central level it is also suggested that by 2004-05 service tax should be merged with the MODVAT to evolve a manufacturing stage value added tax. In the case of states, it is argued that to evolve a destination based retail stage value added tax, it is necessary to give concurrent powers to tax all services subject to certain safeguards to ensure orderly development of the consumption tax system.

If the central government thinks that simply by giving a directive to the Eleventh Finance Commission to design a transfer system linking transfers to revenue deficits it can solve the problem of the growing revenue deficits of the states, it is grossly mistaken. There are systemic problems affecting the states' finances and these need to be addressed. The transfer system alone cannot bear the burden of adjustment.

This article examines the trends in interstate inequalities in the levels of income in India over the last three and a half decades. Contrary to the predictions of neoclassical growth theory that interstate differences in income levels tend to reduce as they approach the steady state equilibrium, our analysis shows widening interstate disparities. To understand the causes of this divergence, the article examines the determinants of interstate differences in growth rates and analyses the role of interstate transfers - explicit and invisible - in determining the geographical spread of investment and incomes. It finds that divergence in income levels has been mainly caused by the allocation of private investments which in turn, has been influenced by the inequitable spread of infrastructure. The inequitable nature of public expenditure spread across states is attributed to the inability of the intergovernmental transfer mechanism to adequately offset the fiscal disabilities of the poorer states as well as regressive nature of the invisible interstate transfers.