Once Bitten, Twice Shy

Business Standard     12th August 2020     Save    
QEP Pocket Notes

Context: The sharp rise in States’ share in gross tax collections to 50% has failed to assuage their fears on declining devolution.

Rising State’s Share in Fiscal Devolution

    • The share of the states in the Centre’s gross tax revenue in the first quarter of 2018- 19 was about 40% it went down to 37% in the same period of 2019-20 but went up sharply to 50% in April-June 2020-21.
      • The Fourteenth Finance Commission had raised the states’ share in central taxes by almost 10% points to 42% from 2015-16.
    • The Centre and the States equally shared the total gross tax collections:
      • In the first quarter of 2020-21 — the states got Rs 1.34 trillion and the Centre got the remaining Rs 1.35 trillion.

Reasons for States’ caution against low tax devolution:

  • Fear that current trend might not continue: Past trends do indicate that the first-quarter transfers to the states are always higher, but that share declines by the time the year ends.
        • For E.g. the total tax devolution for 2018-19 was 37% of the total gross tax collections by the Centre, down from 40% in the first quarter.
        • For E.g. In 2019- 20, the tax share of the states for the full year was 32% of the Centre’s total gross tax collections, down from 37% in the first quarter.
  • More devolution because of Centre clearing arrears: States fear that the Centre has expedited the process of clearing of past dues and whenever the situation improves, their share will decline.
  • Apprehension about lowering the devolution by the 15th Finance Commission (15th FFC)
        • Attempt to force them to share the Centre’s burden of recapitalizing public-sector banks, which will effectively result in a reduction in tax transfer to the states.
  • Devising a separate mechanism of funding of defence and internal security – as asked by the Centre to the FFC, might squeeze the share of states.
  • Reduction in the total divisible pool: The Centre’s reliance on more cess and surcharges and reduction in the development schemes budget has reduced states’ financial capacity: 
      • For E.g. The share of cess and surcharges in the Centre’s gross tax revenue was about 6 %in 2014-15, but it has exceeded 10% in each of the last two years, reducing the devolution share to states.
      • The Centre’s decision to curtail expenditure on development schemes has also led to a financial squeeze for many states.

Conclusion: The unpleasant experience of the past several months has made the states wary about both the sudden rise in the transfer of central taxes and the future trends in devolution.

QEP Pocket Notes