Poll promises make VAT cuts unlikely

Gujarat finance minister Nitin Patel, on Wednesday, will present his budget for 2013-14 in the state assembly, his second budget in 11 years. He had presented his first budget on February 27, 2002, the day a fire broke out in the Sabarmati Express at Godhra, killing 58 passengers and triggering state-wide communal riots that claimed over 1000 lives.

On Tuesday, a detailed presentation was made before chief minister Narendra Modi after which budget details and the finance minister’s speech was finalised. In a marathon meeting with the chief minister, the finance and planning department explained how the budget had been planned and allocations made. The department explained the rationale behind allocations made against various heads.

The common man’s expectations from the state budget are mainly lower taxes on fuels and higher allocations to education, infrastructure and health to boost development in the state. But between the hopes of the people and what is delivered on Wednesday are the dynamics of politics which must been on the mind of the finance minister when he was deciding the details of the budget.

It may be mentioned here that 42.5% of the total tax revenue of the state government comes from tax (VAT) on petroleum products, the highest in the country.

The biggest challenge before Nitin Patel is allocating funds for promises made in the BJP’s election manifesto released before the assembly polls last year.

The party had promised housing (50 lakh in the next five years), adequate water to Saurashtra (Rs10,000 crore in the next 3 years) and an underground sewage system for the state (Rs4000 crore) to name a few.

To increase spending on development schemes, the government need funds and to meet fund requirement it would need to increase it tax revenue.

After the BJP’s victory in the 2007 assembly elections, the then finance minister Vajubhai Vala had outlined, in his budget speech, the importance of human development index (HDI) and allocated 43% of the total annual plan outlay to social sectors – education, health, drinking water, housing, nutrition and social welfare.

“To accelerate the process of development, more financial resources will be required in the Consolidated Fund of the State. In order to raise additional financial resources, I propose to impose an Additional Tax, in addition to the existing Value Added Tax being levied on the sale of goods in the state,” he had said.

The total plan outlay increased two-and-half times in the next five years (2008 to 2012) and allocation to the social sector also increased in proportion.

However, the state’s performance on HDI indicators has remained below expectation. According to the India Human Development Report-2011, Gujarat slipped by one place in rankings at the national level. This means that Gujarat needs to invest more in the social sector to promote inclusive growth in real sense.

Gujarat’s poor performance in the social sector was an election issue during the recent assembly polls. Hence, it would be worthwhile to examine poverty, malnutrition, sanitation and other related issues.

During Vala’s tenure as the finance minster, the aim of the budget-making exercise was to present a surplus budget though the very next year, the budget presented a deficit in actual accounts as estimates had to be revised.

Starting from 2005-06 growth of revenue from state’s own sources has been less than the flow of money from the state’s share of central taxes. The total debt and market borrowings have also shown an increasing trend. As the state’s growth has outstripped the borrowings, they are currently not a threat to the state’s finances. However, they may become a burden if spending is not done wisely.

There are two important aspects of this year’s budget that the minister has to look at. First, the tax levied but not realised; and second, widening of the tax base.

The first means that the government had expected revenue from certain taxes which, due dispute or some other reason, has not been deposited in the treasury yet. Total such taxes outstanding were Rs10,922 crore as on March 31, 2011. The government can tap this resource and raise money.

As for widening of the tax base, 42.5% of the total revenue (from VAT) came from taxes on petroleum products, the highest in the country. According to 2010-11 accounts, only 11% of the total state GDP (Rs56,450 crore) contributed 42.5% of taxes (Rs18, 283 crore) and remaining GDP of Rs4,56,723 crore contributed Rs24,737 crore. To put it simply, the tax burden on petroleum products is 32% while that on the other sectors of the GDP is just 5%.