Gujarat Receives Much Less Than What It Pays to Centre

Following is a report by noted tax consultant in Ahmedabd Shri Mukesh Patel, published in Times of India, Ahmedabad edition on front page today. It’s worth reading as it narrates facts and figures about what Gujarat gives to the centre and what centres gives back to Gujarat.

With only 5% population, Gujarat contributes 9% (effectively even much more) of the country’s tax revenues! However, what Gujarat gets in return is just 3.45% of the Centre’s tax revenue allocated to states!

How long should Gujarat keep on cross-subsidising the fiscal inefficiency of weaker states? Whether Gujarat gets its fair dues from the Centre has been a matter of sharp political debate in recent past. Let us analyse the issue.

Contribution to tax revenues

Fiscal Year 2007-08 budgeted India’s direct and indirect tax revenue collections at Rs 5,50,000 crore. Of this, Gujarat’s share amounted to Rs 50,000 crore, translating to a contribution of 9%. India’s industrial powerhouse Gujarat has consistently topped in paying indirect taxes such as excise and customs, which are paid on site. That Gujarat is numero uno on this front among Indian states.

But, when it comes to direct taxes, Gujarat ranks seventh. However, this needs to be logically appreciated in the correct context. Corporation tax, which is a major component of direct taxes, is paid by a company in the state where its registered office is located. Large companies like Reliance, ONGC, L&T, Essar, Hindalco, Tata Chemicals, Shell, General Motors, United Phosphorus and others, which have substantial operations in Gujarat, are required under law to pay corporation tax in Mumbai or Delhi. No wonder, Maharashtra and Delhi enjoy first and second positions in their direct tax contributions.

If the pro-rata contribution of corporation taxes paid by these industrial houses is taken into consideration, the effective share of Gujarat to the national tax exchequer should stand much higher than 9%.

Tax revenue allocation

As decided by the 12th Finance Commission, around 26% of the Centre’s tax revenue is allocated to the states. In 2007-08, the allocation stood at Rs 1,45,000 crore. Gujarat got only around Rs 5,000 crore — 3.45%. This is because Gujarat has over all these years been required to subsidise the fiscal inefficiency of financially weaker states.

How long should such crosssubsidisation continue? ‘Robbing Peter to pay Paul’ has been the plight of Gujarat, which has always sacrificed, getting much less in return compared to its contribution. Gujarat has been strongly pleading in its presentations before the Finance Commission to consider the state’s contribution in collection of Union taxes as the most relevant parameter for deciding on tax share allocations to states.

If only Gujarat had received Rs 8,000 crore more (towards its due share) in 2007-08, the state’s taxpayers could have easily been asked to pay 38% less taxes, against the state taxes’ levy of Rs 21,000 crore. Let us speak up, dear tax payers of Gujarat, in a voice that comes to be heard!