Date:31/03/2006 URL: http://www.thehindubusinessline.com/2006/03/31/stories/2006033103180300.htm

Back States for increasing professional tax cap

C. Shivkumar

Move would help them reduce revenue deficits, tax coverage

Revenue constraints
Almost all the States have reached the ceiling of Rs 2,500 per person.
Enhancement of professional tax would impact personal I-T collections.
States realise about Rs 3,000 crore out of professional taxes alone

Bangalore , March 30

Faced with revenue constraints, some States have approached the Centre for enhancement of the professional tax ceiling.

Sources said that almost all the States have reached the ceiling of Rs 2,500 per person fixed under Article 276 of the Constitution. This ceiling was fixed in the 60th Amendment in 1988. Accordingly, this ceiling needed to be revised upwards, they said. Besides, with the transition to the value-added tax regime, States have very little flexibility for additional resource mobilisation (ARM). Professional tax was one of the few options available to them for ARM. States currently realise about Rs 3,000 crore out of professional taxes alone.

The sources said that States have sought the enhancement of the ceiling to capture more professions and enlarge the scope.

Flexibility

Besides, sources said that there was flexibility for them to realise greater revenues from information technology and business process outsourcing professionals, in view of their high tax paying abilities.

This was especially in States such as Karnataka, Andhra Pradesh, Maharashtra, Tamil Nadu and the New Delhi where most of the IT/BPO entities were concentrated.

Enhancement of the ceiling would help the States in reducing their revenue deficits and tax coverage, the sources added. However, one of the major constraints was that enhancement of professional tax would impact the personal income tax collections. This was because professional taxes payments are income tax exempted. But the impact is expected to be minimal since income tax collections have been rising.

What has also prompted the States to push for raising the ceiling was that most of them currently have been resorting to fiscal correction through reduction in capital and social sector expenditures.

Further reduction in such expenditure was no longer possible, sources said. Moreover, funding such expenditure through borrowings was not feasible on a continuous basis, they added. Funding such expenditure through borrowings would result in raising their revenue expenditure.

Few States are prepared for such a situation since most of them are in a fiscal correction mode.

Therefore, additional revenues would have to be generated for meeting such expenditure, especially for creation of social infrastructure, including primary schools and hospitals, the sources added.

What has also affected the State revenues was the shifting of liquefied petroleum gas from VAT to the Central Sales Tax, the sources said.

The adverse impact of this shift needed to be compensated by other resource raising mechanisms. The absence of such alternative resource raising mechanism was also one of the major reasons for the States' reluctance to cut sales tax rates on diesel and petrol.

These two items contribute substantial chunk to the States' revenue kitty. Both these are currently taxed on an ad valorem basis.