The Twelfth Finance Commission chairman C Rangarajan said on Tuesday that he was in favour of an early implementation of the value added tax regime. He also criticised the states for competing with each other in offering tax concessions to attract investment saying it leads to "serious erosion" of revenue.
"Introduction of nationwide VAT will require cooperative agreement among the states. While several states expressed difficulties, there is at least an agreement in principle to introduce VAT. We have to move faster in this direction," Rangarajan said at a seminar in New Delhi.
In meeting the challenges of globalisation, the government must create a common market within the country, he said at the seminar on 'Fiscal Federalism -- Old and New Issues' organised by the National Institute of Public Finance and Policy.
"Restrictions on the movement of goods and various other impediments have to go," the commission chairman said.
Stressing on tax reforms, he said, "The state governments in India do compete for capital. However, this competition should not result in a 'race to the bottom' when the states taken as a whole suffer."
"In fact, competition in tax concessions leads to a serious erosion of revenues," he said, adding states have to come together in fixing floor levels in tax rates.
"It is no doubt true, not only capital but also people will move to jurisdictions where the provision of services is better, Rangarajan said, stressing on better infrastructure facilities to attract higher investment.
Rangarajan said the 80th amendment in Constitution has broadened the ambit of shareable central taxes.
"The enlargement of shareable pool to cover all central taxes except those listed in Articles 268 and 269, and earmarked cesses and surcharges, has enabled states to share in the overall buoyancy of taxes," he said.
The former RBI Governor said the fiscal federalism such as assignment of taxes and responsibilities among states, continue to be important in the changing scenario.
"Fiscal federalism must enable central and state governments to operate in such a way that it leads to efficiency in the use of resources," he said.
In this context, he said "states that perform more efficiently in the delivery of services or raise more revenues relative to their tax bases, should not be penalised."
"The growth experience of 1990s shows that developed states with broad industrial base and developed market institutions and infrastructure have performed much better than those without them," he said.