Centre, states, bake a bigger revenue pie after SC’s order on alcohol

The Supreme Court ruling upholding the right of states to tax all alcohol, including the industrial variety, should help them improve fiscal metrics. This verdict follows another judgment earlier this year by the apex court permitting states to tax mining. These are hard-won gains by states, which have been left with few resource mobilisation avenues post-GST. Although GST is yielding tax revenue on expected lines, states could be experiencing some loss of agency. GST offers little room to manoeuvre in revenue mobilisation beyond improving administration, expanding coverage or collapsing rates. Since taxes on both consumption and income have become a collaborative endeavour with the Centre, states are seeking greater autonomy over taxing resources originating within their territory.

States have surrendered the bulk of their freedom over taxation, but are confronted with individual development challenges that justify this freedom in the first place. The Centre, on its part, is committed to balanced development that assigns higher weights to development challenges common to all states. These approaches are occasionally in conflict. Centre-state resource transfers are bundled in a policy template designed in New Delhi that may not resonate in state capitals. This apart, states find it difficult to operate within fiscal parameters set out by the Centre, where everyone is in breach. Here, too, states face some loss of agency over expenditure.

Conflict resolution should ideally be directed at baking a bigger revenue pie, rather than deciding on how it should be sliced. States are progressively increasing their share of the divisible pool of government resources and will find it in their best interests to accept the consensus over taxation. Where scope exists to expand their influence over resources, states are free to do so, with the proviso that their development is not in isolation. Fortunately, areas of dispute have narrowed considerably with economic liberalisation. Where they persist, enlightened self-interest could offer more enduring solutions.