States Wait for a Larger Slice

Context: The 15th Finance Commission (FFC) report, ‘Finance Commission in COVID Times’, presented to the President reflects the balance between the Centre and states.

Challenges to State Finances:

• Low Tax Devolution: Despite increasing tax devolution from 32% to 42%  in 2015-16, the rise in states’ share in gross central taxes is more modest at 28-29% to 33-34%
• Cesses and surcharges are not shared with states: For E.g. shareable duties on petrol and diesel that were replaced with a cess in Budget 2018 bypass the divisible pool.
• Resistance towards non-lapsable fund: States have opposed a non-lapsable defence fund as it would shrink the divisible pool and could set a precedent to address similarly committed expenditure.
• Sub-Optimal Growth: The combined tax revenue of the Centre and states stood at about 17.5% of GDP in 2018-19, far below the estimated tax capacity.
• Increasing Revenue-Expenditure Gap: Spending on health and other support measures for households and firms will increase prolonging the ‘scissor effect’ on state budgets.
• States’ debt burden has been rising: as the Ujwal Discom Assurance Yojana failed, leading to mounting utility dues to power generators.

Way Ahead: Additional revenue can be generated by the following measures: 

• Need to broaden the tax base and rationalize rates both for GST and customs tariffs on industrial goods.

• Re-Vamping GST: Fewer rates, broader base to include petroleum, electricity duty and real estate.

• Using data analytics and audit trails to track the progress: of critical raw materials along the chain of value addition will raise tax buoyancy and tax compliance.

• States must collect income tax from high-income farmers: and user charges for electricity and water.

• Demarcating fiscal base of local government: such as property tax and linking devolution of state finances to district and lower levels of government to effectively tap that fiscal base.

Conclusion: Adequate resources through tax devolution and grants would enable states to tackle interstate inequalities effectively.