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Ministry for refund of unremitted state taxes
August, 18th 2008

In a fervent representation to the 13th Finance Commission, the commerce ministry has demanded a scheme whereby the un-remitted state taxes are refunded to the exporters.

Since most state governments are unwilling or unable to refund these taxes, it would be in order to allow the central government to reimburse these state taxes or duties paid by the exporters and recover the same from out of the payments due to the states according to the devolution formula approved by the Finance Commission, pleads the Ministrys document giving inputs for the Commission.

The commerce ministry has also suggested that the Commission may either direct the state governments to ensure that social service amenities are provided to the plantation labour by their respective state governments or in the alternative earmark an appropriate provision (about Rs 4,000 crore) for this to the ministry. Another suggestion is to set apart funds to be utilised by the states for providing and strengthening infrastructure for exports.

The commerce ministry is bitter that although the principle that goods and services must be exported and not the taxes is well established and even the agreements at the World Trade Organization allow rebates of such taxes, there are not only central levies and taxes but also a plethora of taxes levied by the state governments, which are not refunded.

The document tabulates the tax incidence of various states and says that according to a rough estimate, average rate for such rebate on exports would be 3.01 per cent i.e., 2.74 per cent (for the components of electricity duty, sales tax on petroleum products and Central Sales Tax @ 2 per cent) + 0.27 per cent (approx. for the component of octroi, mandi tax, turnover tax, entry tax etc). With the present export growth rate of 23 per cent, Indias merchandise export turnover will be $234 billion by 2010 and $660 billion at the terminal year of the 13th Finance Commission award.

Hence, the financial implication on rebating of these un-rebated state Indirect taxes will be around Rs 18,500 crore for exports of $234 billion and Rs 52,390 crores for exports of $660 billion, says the commerce ministry.

Giving details of the growth and export potential of the plantation products like tea, coffee, etc., the commerce ministry says that in a competitive world, the plantation owners are unable to absorb the costs and give benefits of housing, drinking water, electricity, schools, roads and other social amenities to workers (about 1.7 million).

The state governments that collect various local taxes/cesses have abdicated their responsibility for providing social services to the plantation labour on the ground that they cannot fund the construction of private roads within plantations. Nor can they provide housing/ drinking water facilities as the land is either owned/leased to the plantation owners and is not in the name of the plantation labour, says the representation to the Finance Commission.

The commerce ministry says that many states do not provide adequate support to exports as they do not derive any direct fiscal benefits as most of the export clusters do not pay taxes. The Ministry plans to spend Rs 3,600 crore in the 11th Plan to help the states build export related infrastructure through the ASIDE scheme but to bridge the gap in availability of export related infrastructure, the Finance Commission should allocate Rs 20,000 crore more, says the representation.

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