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Major issues behind a State tax

IT IS MORE than a year since the Tamil Nadu Government, in its budget for 2002-03, introduced a higher and discriminatory rate of sales tax on more than 100 items of import, including raw materials and equipment, compared with the tax on their indigenously produced counterparts. The levy, over which the spokesman of a promotional agency of Sri Lanka expressed concern recently, is an issue of paramount importance not just from the point of view of tax rates but because of the implications it has for India's body-politic and economy. The question assumes particular significance in view of the deafening public silence over the issue on the part of both the leadership of trade and industry and the powers-that-be at the Centre and in the States.

For, the question whether a State should be allowed to pierce the level of tariff protection (viz. duty on imports) notified by the Central Government is not just for courts to decide but for the policy-makers to take a view. First, by levying a higher sales tax on several import items compared to their "indigenous" counterparts, Tamil Nadu (and whichever other State might have resorted to such a measure) has, in effect, challenged the sovereignty of the Centre over matters of international trade. Second, even if it is assumed that such a power exists with the States under the scheme of the Constitution, this would clearly mean enabling violation of one of the basic principles that have governed international trade for more than half a century, viz. "national treatment" of (or non-discrimination against) imported goods vis-a-vis domestic goods in matters of domestic taxation, technical standards etc. By keeping mum over such a fundamental issue, the Centre too has enabled the economic and political system to skip an open and serious debate over the roots of the crisis, viz. the absence of a provision in the Constitution to get international treaties ratified by Parliament, or in the alternative, to get the Uruguay Round agreement (and similar agreements) passed by an Act of Parliament to enable its implementation across federal structures, as facilitated, for instance, by the Uruguay Round Implementation Act of the U.S.

One would normally expect that those interested in a higher level of protection against imports than allowed by the Central Government would display the confidence and perseverance to raise the issue with the proper authority, viz. New Delhi, and persuade it to increase import duties up to the WTO-bound rates or to fight against lowering of duty in the name of exposing Indian industry to competitive pressure. If instead, such interests exert extraneous pressure on the States, it does not reflect well on industries' leadership. If States levy higher taxes on imports not out of protectionist pressure but for garnering revenue, it would be all the more unjustified for industry to acquiesce in such an approach. No doubt, it is not uncommon for other members of the WTO, including developed countries, to undertake measures that go against the spirit — and sometimes even the letter — of global trade agreements and commitments. Similarly, there have been some sub-federal measures in some countries that undermine their international commitments. But none of these has perhaps been as serious a violation of global norms as denial of national treatment to imported merchandise. By continuing public silence over the issues involved in State-level measures affecting international trade and the Centre's sovereignty and powers, India will only be repeating its record of avoiding public discourse on real issues, as happened at the time of the Uruguay Round/Dunkel Draft, when the debate (led, on the dissenting side, by the Left and a section of the Sangh Parivar) was over a virtually non-existing option of keeping out of GATT/WTO, instead of on what broad objectives should be set for the country's negotiators. Persisting with this tendency to evade thorny issues involved in "globalisation" of the economy might only aggravate social and political tensions, instead of easing them.

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