Pool in to Rope in Fuel

Context: Until fuel is included in Goods and Services Tax (GST), it will continue to suffer from double taxation, leading to a burden on consumers and the wider economy.

Advantages of including cesses and surcharges in the general divisible pool: to be shared with states

• It will help to increase states share in the divisible pool: At present, it is only 35%, as opposed to the promise of a 42% share of the divisible pool under the 14th Finance Commission.
  • The share of cesses (taxes for specific purposes like improving primary education) and surcharges (a temporary tax on tax) have been rising and are kept outside the purview of Article 270.
• It will be sustainable: unlike when the Finance Commission goads the government to abandon its reliance on temporary taxes. (as Centre has the power to impose tax and cesses at a later date.)
• Builds confidence of states: Budget 2021’s imposition of agricultural infrastructure development cess while reducing the corresponding custom and excise duties have indulged chicanery among states.
• Thus equal sharing of cesses will promote cooperative federalism.
• Provide valuable resources to the states for their capital expenditure: At present, states are curtailing capital expenditure for meeting Fiscal Responsibility and Budget Management (FRBM) targets.
• Incentivises government to focus on tax administration: Thus beneficial for the taxpayers. (since an easy route for revenue mobilization will be shut.)
• Improved compliance: as lower-level governments are closer and more accountable to citizens

Conclusion: Combining devolved revenues with special-purpose grants to the states by amending Article 270 is a possible solution for the inclusion of cesses and surcharges in the general divisible pool work in practice.