Tamil Nadu: Tax and Economic Reforms | Tamil Nadu State PSC (TNPSC): Preparation - TNPSC (Tamil Nadu) PDF Download

Introduction

Tamil Nadu stands out as a model state in India, having effectively utilized early recognition of manufacturing's significance to drive its economic growth. The state has successfully harnessed manufacturing to enhance employment, skill development, and overall economic impact, surpassing many other states in key developmental indicators. This document provides a detailed overview of Tamil Nadu's economic reforms, tax policies, and the reasons behind its economic success.

Economic Development and Reforms

Manufacturing and Economic Growth

• Early Recognition of Manufacturing: Tamil Nadu has been proactive in embracing manufacturing, which has led to a significant share of the national manufacturing sector. This early focus on industrial growth has enabled the state to develop a robust manufacturing base, especially around Chennai.
• Employment and Skills Upgradation: The manufacturing sector not only provides jobs but also enhances skills among the workforce, generating a broader economic impact compared to the services sector.
• Economic Multiplier Effect: The economic benefits of manufacturing extend beyond direct employment, creating additional opportunities and stimulating related sectors.

Poverty Reduction and Social Policies

• Effective Social Policies: Tamil Nadu has implemented extensive social policies that cover a large portion of the population. Key initiatives include:
  • Public Distribution System (PDS): Universal coverage providing essential items like rice, sugar, kerosene, and cooking oil.
  • Midday Meals Scheme: Aimed at improving student nutrition and attendance.
  • Public Health Infrastructure: Ensuring widespread access to healthcare.
• Poverty Reduction Success: Tamil Nadu has made significant strides in reducing rural poverty from 51.2% in 1993-94 to 15.8% by 2011-12, outperforming Gujarat in this regard.
• Human Development Index (HDI): By 2015, Tamil Nadu ranked 3rd in HDI due to improved literacy rates and health indicators.

Educational and Health Advancements

• Increased Literacy Rates: Tamil Nadu's literacy rate rose from 67% in 1993-94 to 81.1% in 2011-12, with notable progress among SC/ST communities.
• Health Indicators: Tamil Nadu outperforms Gujarat in several health metrics:
  • Infant Mortality Rate: 22 per 1,000 live births vs. 41 in Gujarat.
  • Maternal Mortality Rate: 97 per 100,000 live births vs. 148 in Gujarat.
  • Child Immunization Rate: 80.9% vs. 45.2% in Gujarat.
  • Undernourished Children: 31.1% vs. 51.7% in Gujarat.
• Universalistic Social Policies: Tamil Nadu’s approach to public services is broadly inclusive, ensuring that facilities like education and healthcare are available to all, rather than targeting specific groups.

Economic Liberalization and Growth

• Impact of Economic Liberalization: The 1991 economic crisis and subsequent liberalization created opportunities for private sector investments, including foreign direct investment (FDI).
• Foreign Investment: Tamil Nadu attracted significant foreign investment, totaling ₹8,500 crore from 2000-06, due to its prepared infrastructure and enabling conditions.
• Jayalalithaa's Contribution: During her tenure (1991-96), Chief Minister Jayalalithaa played a crucial role in driving economic growth and development in Tamil Nadu.

Recent Reforms and Initiatives

Digital Services and E-Governance

• E-District Services: Digitalization of services including certificate issuance and tax filing.
• E-Payment and Refund Systems: Introduction of e-payment for taxes and online refund requests.
• E-Tendering and Land Records: Implementation of e-tendering and digital management of land records.

Industrial Development

• Industrial Estates and Infrastructure: The establishment of industrial estate zones in the 1960s and development of port facilities and state highways to support industrial growth across districts.
• Education and Healthcare Policies: Continued focus on mid-day meals, preventive healthcare, and education reforms to build a skilled labor force.

Challenges and Structural Bottlenecks

• Land Registration Costs: Hidden costs in land registration contribute to high land costs. A proposed solution is to create a land bank and streamline investment flows.
• Labour Flexibility Issues: Constraints in hiring temporary labor and complying with the Factories Act, 1948, along with rising trade unionism, pose challenges for businesses.

Future Directions

Strengthening Core Sectors

• Focus on Core Industries: Tamil Nadu should continue to leverage its strengths in auto, leather, textiles, and IT-ITES sectors to drive economic growth.
• Simplification of Business Processes: The Madras Chamber of Commerce and Industry recommends a single business act for streamlined clearances and simplified labor laws.

Tax Reforms

Overview of State Taxes: Tamil Nadu's tax structure includes Sales Tax/VAT, Luxury Tax, Stamp Duty, State Excise Duty, Entertainment Tax, and Professional Tax.

• VAT Implementation: Introduced on January 1, 2007, to replace the Sales Tax system.
• Luxury Tax: Applied to luxury services in hotels and clubs, introduced in 1996.
• Stamp Duty Amendments: Increased to control evasion and make property registration compulsory.
• State Excise Duty: Levied on liquor, with recent amendments to increase duty rates.
• Entertainment Tax Changes: Replaced by GST in 2017, with a recent addition of a 30% tax on top of the GST rate.
• Professional Tax: Levied by local councils on professions and employment.

GST Impact

• Transition to GST: The Goods and Services Tax (GST) has subsumed many state taxes, with future tax decisions managed by the GST Council.