The share of states in divisible pool is shrinking despite bearing higher burden of expenditure
The share of states in divisible pool is shrinking despite bearing higher burden of expenditure
About two weeks ago, chief ministers had expressed concern over the shortfall in the state’s revenue at a meeting of the NITI Aayog chaired by the prime minister. They demanded a greater share in the divisible pool of taxes and an expansion of GST CompensationBoth of these have been the subject of dispute between the central government and the states for a long time.
financial health of states With the implementation of Ujjwal Discom Assurance Scheme, farm loan waiver, as well as slowdown in growth in 2019-20 had taken a turn for the worse. But, increased spending and lack of revenue during the pandemic further strained their finances.
In this context, it becomes important to understand who generates the revenue and who bears the bulk of the expenditure. The constitution empowers the central government to raise more revenue while the states are entrusted with the task of carrying out most of the development and welfare related responsibilities. According to the 15th Finance Commission report, in FY19, the central government mobilized 62.7% of the total resources mobilized by the central government and the states, while the states borne 62.4% of the total expenditure. chart 1 Shows the share of the central government and states in the total resources raised and the total expenditure in FY 2019.
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This allocation of taxation powers and expenditure responsibilities results in an imbalance, and hence the constitution provides for sharing of the revenue of the central government with the states. Successive Finance Commissions (FCs) have attempted to bridge the imbalance by increasing the share of states in central taxes. Although the 14th and 15th Finance Commissions increased the share of states in gross taxes to over 40%, the actual share never reached this mandatory level. After reaching a peak of 36.6% in FY19, the share of states fell and has since stabilized at around 29%. Also, the difference between the share recommended by the FC and the actual transfer has gone up to over 11 per cent, the highest in at least two decades. chart 2 Shows the share of the states in the divisible pool of taxes mandated by the FC and the actual share transferred to the states.
Therefore, even though the FC increased the share of states in central taxes, this did not translate into an increase in the actual share transferred as the divisible pool shrinks. This can be explained by depicting revenue sharing during the pandemic. As gross tax revenue declined during the pandemic, the share of states in central government taxes recorded a steep decline of 15% and 9% in FY15 and FY21, respectively. But, the share of the central government continued to increase. This is because the Center has increased its revenue by levying cess and surcharge which are not shareable with the states. chart 3 Shows the share of the states and the central government in the gross tax revenue.
Over the years, the share of cesses and surcharges in the gross tax revenue has increased significantly. From 10.4% in FY12, their share climbed to 20% by FY2011, suggesting the central government’s excessive reliance on these tools to raise revenue. While the increase in cess/surcharge revenue, mainly through duty on fuel, has increased the central government exchequer, it has also reduced the divisible pool of resources. chart 4 Shows the share of cesses and surcharges in gross tax revenue.
Various cesses and fees are levied by the government to mobilize resources. They are transferred to the reserve fund to ensure that they are being used for the intended purpose. Worryingly, in FY20, around 40% of the cess levied – ₹78,000 crore – was not transferred to the reserve fund. Between FY10 and FY20, ₹1.28 lakh crore was collected as cess on crude oil. However, not a single penny was transferred to the Oil Industry Development Board (OIDB). Table 5 Lists the issues identified by the Comptroller and Auditor General in respect of Cess and Levies.
The shrinking of the divisible pool despite the high expenditure burden on the states shows that the Chief Ministers’ objection appears to be correct and needs to be redressed.
nihalani.j@thehindu.co.in
Source: Finance Commission Report, Union Budget, CAG
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