Manmohan warns States against unviable tax sops

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Manmohan Singh
Manmohan Singh

Special Correspondent

"Jury still out on whether they promote growth"

  • We have to enable a common economy
  • Tax systems largest barriers to trade
  • Border checks, taxes on vehicles are the other barriers

    CHANDIGARH/NEW DELHI: Prime Minister Manmohan Singh on Thursday warned the State Governments against the unhealthy practice of providing "unsustainable" tax breaks and fiscal incentives to industrial projects in their bid for faster growth.

    "The jury is still out on whether these policies [tax sops] really promote industrial growth. But in the process, in the excitement to have headline-grabbing MoUs [memorandums of understanding], we offer incentives, both fiscal and financial, which our finances cannot sustain," he said at the Northern Chief Ministers' Conclave, organised by the PHD Chamber of Commerce and Industry in Chandigarh.

    Competitive populism

    "There is no race to the bottom in fiscal terms through competitive populism," Dr. Singh said, while urging the apex industry chamber to work with the State Governments to ensure an end to this unhealthy race for speedy industrial development. "We have to enable a common economy and a single market to emerge."

    Interestingly, his advice to the States comes on the heels of Congress president Sonia Gandhi's warning against diversion of prime agriculture land for industrial projects, which triggered a debate over land allocation for special economic zones.

    Referring to the conference theme, "Removal of barriers to the inter-State trade," Dr. Singh said the greatest obstacle to free trade was the multiplicity of taxes, an area where much more was required to be done despite the success of the value added tax (VAT) scheme, introduced in lieu of sales tax.

    The other hurdles to trade and free movement of goods were border checks and taxes on vehicles. Trade in farm produce faced an additional hindrance.

    Asking the States to correct these ills and allow free trade through a harmonised system of taxation, Dr. Singh said: "The largest barriers to trade have been our tax systems. I am told that free flow of trade can add up to two per cent to State growth rates across the region. ... VAT should be the only tax on goods. We continue to have octroi, luxury taxes, mandi taxes and other levies."

    He said: "In the long run, as we move to a common Goods and Services Tax, most of these taxes should disappear. I urge the Chief Ministers to work towards harmonising and rationalising VAT within the region as a first step toward GST."

    The Prime Minister also advised the State Governments to dismantle the financial and physical barriers that hindered trade with the neighbouring States. "These policies will not pay off in the long run. ... What will pay off are policies which strengthen the human and physical resource capabilities of States," he said.

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