She makes the suggestion to Finance Commission chairman

Chief Minister Jayalalithaa on Monday called for a new formula of devolution of resources among States.

Addressing Chairman of the Fourteenth Finance Commission Y. V. Reddy and his colleagues at the Secretariat, the Chief Minister described her suggestion as a “simple, robust and equitable formula,” which was based on three factors - population of the 1971 Census, fiscal discipline including tax effort; and fiscal capacity distance. As for the fiscal capacity distance factor, she said this would address the interests of the States which lacked the capacity to raise resources on their own. It should also be used to penalise those States that had the taxable capacity but failed to utilise it fully.

She exhorted the Commission to attempt to match expenditure responsibilities with resource needs, before working out the proportion of the resources to be allocated to States. A “predictable, non-discretionary and non-discriminatory mechanism” in devolution had to be put in place.

On the Raghuram Rajan committee on identification of backward states, the Chief Minister urged the Finance Commission to “reject outright” the Report of the Committee, as it was fraught with a lot of deficiencies. “The Commission should independently make its recommendations without getting pressured by such misleading and unnecessary inputs,” she said.

Recalling that Tamil Nadu had a number of objections to the proposed design of Goods and Services Tax (GST) under the modified draft Constitutional Amendment Bill, she said her primary concern was about the impact of the proposals on the fiscal autonomy of the States and the huge permanent revenue loss to be caused by the GST to a manufacturing and net exporting State like Tamil Nadu.

To overcome the present deadlock over the GST, “the levy, collection and appropriation of the substitutes for Value Added Tax (VAT), Central Excise Duty and Service Tax within a State should be delegated completely to the State machinery, with the Central machinery focusing on interstate taxation.”

As regards the subject of subsidies, she told the Commission that Tamil Nadu too, as in the case of the Centre, was providing high levels of subsidy in food, fertilizers and fuel. “It would be very difficult for Tamil Nadu to take on any portion of the Centre’s current liabilities on this score without commensurate transfer of resources,” she said. She suggested that five per cent of the divisible pool would be earmarked for local bodies.

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