Dr. Sridhar Kundu
The state government of Meghalaya has increased its budget for the year 2022-23(BE) by 9 percent over its previous year. In the last five years, the state budget has increased over 18 percent per annum. Rise in government expenditure is an indication of expansionary fiscal policy which is required to influence growth and economic development of the state.
For any government, the rising spending needs to be matched with an equal or higher rise in revenue. Any shortfall of revenue growth would result in a deficit. Financing of this deficit through loans, borrowings and other means add on to the public debt.
For Meghalaya government, growth in revenue maintains a slower pace compared to growth in expenditure. In 2022-23, the revenue growth is estimated to rise by 5 percent and in the last five years, the growth has remained about 15 percent per annum. Relatively lower rate of revenue growth results in accumulation of debt. As on March 31, 2021, total outstanding debt of the state government stands at Rs. 13461 crore which is about 39 percent of state GSDP. The annual average growth of outstanding debt is about 10 percent in the last five years.
Public expenditure plays a critical role in economic development. One important measure to restrict piling up of debt without limiting the growth in public expenditure is to increase the state’s own revenue resources.
At present, a major share of state’s revenue resources comes from central sharing of taxes which is constitutionally mandated in a federal form of government, and centre’s grants-in-aid. State’s own revenue excluding central share of taxes and grants shares is a negligible 21 percent of total revenue in 2022-23 (BE).
In the state government’s total own revenue, tax revenue shares a larger 79 percent, and the rest 21 percent of revenue comes from non-tax sources. In the last 10 years, this revenue growth has witnessed a wide fluctuation. Estimated tax revenue witnessed a negative growth of less than 1 percent in 2022-23FY.
The state government needs to have a broad-based, progressive, and reliable taxation system to feed its rising expenditure. A larger tax base would improve the tax buoyancy and help in more contribution to the state’s total revenue. Next, a larger share of direct taxes in total revenue would increase its progressivity. Direct taxes generate less incidence on consumption. Third, growth of tax revenue needs to be sustained and made less volatile. With these three characteristics in mind, the state government could redesign its revenue model with considerable focus on following areas,
a. Agriculture income tax- it falls under the state list and the state government obtains legislative power over its functioning. This tax has remained as one of the contentious issues in India’s political domain. As a result, many state governments including Meghalaya do not have taxes on agriculture income.
Nature of distribution of agricultural land in the state shows that the government can expect some tax revenue from this source. According to information from India Data Portal, about 46 percent of land area is owned by small and marginal farmers. These farmers own land with a size less than 2 hectares. But a larger share of land area i.e., about 55 percent of total agriculture land is owned by medium and semi-medium farmers. People having land size of 2-5 hectare and 5-10 hectare are called semi-medium and medium farmers respectively. Large farmers are defined as people having land size of more than 10 hectares and they share only 1 percent of total agricultural land area in Meghalaya.
The state of Assam with similar type of distribution of agriculture land collects tax from agriculture income but revenue from this source is declining. In 2021-22(BE), total revenue was Rs.8.7 crore. But, during the 1990s, the state was collecting over Rs.1000 crore per annum from this source. Information from India Data Portal shows that about 49 percent of agriculture land area in Assam is owned by small and marginal farmers, 41 by medium and semi-medium farmers and the rest 10 percent by large farmers.
b. Property tax – collection of property taxes by the state government has witnessed a declining trend over the last two decades. In 2006-07, revenue from property taxes was Rs. 120 crore and it came down to Rs. 26 crore in 2021-22 (BE). Stamp duty, which constitutes a larger share in total property taxes, has remained in the range of Rs. 10 crore to Rs.20 crore during the last two decades. Declining growth of revenue from property taxes is accompanied by higher growth of urban agglomeration especially in the cities like Shillong, Tura and Jowai, which is unlikely.
c. Goods-passenger tax- this tax is imposed by the state government for transport of passengers, goods, and services within the state. This tax is advocated for its contribution to reduce social cost and negative externalities in terms of pollution. Total tax collected under this head has come down from Rs.36 crore in 2007 to Rs.10 crore in 2021-22(BE). The growth of road and transport sector in the state in the last one decade seems to have less impact on tax revenue from this source.
d. State excise- growth of revenue from state excise has remained volatile. In the last two years i.e. 2021-22(RE) and 2022-23(BE), revenue from this source fell by 4.02 percent and 2.8 percent respectively. Growth of excise is likely to have a positive relationship with economic growth of the state. In the last two years, the state GSDP registered an annual average growth of over 8 percent.
State government collects excise from sell of liquor, diesel, petrol, and motor spirits. It is one important source of revenue for the state government. In 2022-23, its share in state’s own tax revenue is estimated to be 14 percent of state’s total revenue.
e. Non-tax revenue- it is collected by the state government for its provisioning of various services such as, education, health, water and sanitation, public administration etc. In the last five years, the growth in non-tax revenue stands about 15 percent per annum despite having a lower base.
All the revenue sources discussed above can excel with higher growth performances with the help of a better administration reform. The reforms would be in the direction of making revenue collection process simple and affordable. The government machinery needs to take the administration to each doorstep. More engagement of people in the administration process would facilitate increasing revenue and help in earning the trust of government.
(The writer is Sr. Economist, Bharti Institute of Public Policy, Indian School of Business)